Green Bond

Deutsche Hypo issued its first Green Pfandbrief in November 2017. This successful lighthouse project was preceded by intensive preparation, in which numerous processes in the bank were adapted to the green buildings in the portfolio.

By issuing Green Bonds, the Bank also intends to meet the measurably growing demand of investors for investments in environmentally sustainable projects. Through issue of Green Bonds is part of the Bank’s attempts to meet society’s objective of reducing global warming in its role as a financial intermediary.

When issuing Green Bonds, Deutsche Hypo funds itself through bonds whose raised funds are used exclusively to finance energy-efficient (i.e. green) buildings. The Bank issues unsecured bonds as well as Pfandbriefe as green bonds. The Pfandbriefe it issues fulfil all requirements under the German Pfandbrief Act. Senior unsecured bonds issued as green bonds are pari passu with other bonds of the same asset class, which may include issues in benchmark format as well as smaller volumes (private placements).

"Well received by investors”

Some two years ago, Dirk Schönfeld, Head of Treasury, presented the topic of green bonds at Deutsche Hypo within the Bank for the first time. Even back then, he could already see that this topic would become increasingly important for Pfandbrief banks. All divisions and departments at Deutsche Hypo that were involved subsequently worked constantly to promote and advance the green bond project, which was successfully completed when the first Green Pfandbrief was issued in November 2017. Time to take a brief look back, Mr Schönfeld!

Many months of intensive preparations are behind you now. Where did the greatest challenges lie?

We were confronted with one major challenge right from the start. From talking to our colleagues in the market departments, we knew that we already had a rather large number of loans with green buildings on our books. The trick was to identify them and flag them in the Bank’s systems. At the same time, the task at hand was to pave the way for new business. Our aim here was to fine-tune lending processes, from acquisition and payment through to funding. To do so, we launched a new product process (NPP), in which a total of 15 colleagues were involved. We all faced a steep learning curve here. What stands out in my mind as particularly positive is that a tremendous enthusiasm for the topic emerged and caught on throughout the Bank. Deutsche Hypo’s employees can therefore rightfully be proud of the work they have done.

 

That is a lot of effort for a “green hallmark”. In your opinion, what is the advantage of a green issue?

Yes, the period of preparation was indeed associated with a great deal of effort. But it was worth it. We see a genuine added value, although we were initially unable to achieve an advantage when it comes to funding costs. The topic of sustainability in commercial real estate financing is growing ever more important, which is why Deutsche Hypo is focusing more and more on green loans. They allow us to make an important contribution to promoting the concept of sustainability. As a sustainable company, Deutsche Hypo would first and foremost like to act sustainably in its core business and drive forward the ecologically sound development of cities. Through the Green Pfandbrief, we are now giving investors the opportunity to invest consciously in sustainability products. In the long term, we expect the high demand for sustainable products to generate price advantages, of course.

 

How have you structured the programme?

Our focus is on energy efficiency, which is real estate’s main contribution to achieving climate targets. Modern buildings usually have significantly better energy performance than old ones. Our programme only considers those properties that meet our minimum green bond standards. Right now, energy efficiency is determined by property class based on energy certificates using the maximum energy demand or consumption in kWh/(m²*a). Alternatively, a building certificate may also be taken into consideration. Once a year, an internal Green Building Commission reviews and defines all criteria. The funds acquired through an issue are then used solely to finance or fund energy-efficient buildings, such as project developments, existing properties or buildings that have been renovated to be more energy efficient. As a result, we gradually expect to see an increasingly sustainable real estate portfolio.

 

What other criteria are taken into consideration?

Despite the clear focus on energy efficiency, we would like to offer our bond investors additional transparency regarding our portfolio. Regional diversification is nothing unusual in this context. We take things a step further by also showing the distance to public transport or land use prior to the construction of each property. Our framework also governs clear exclusion criteria with regard to controversial business areas, such as the defence industry.

 

Did you see increased investor interest after you announced the issue?

Definitely. Because we wanted to present Deutsche Hypo as a sustainable bank, we organised an extensive road show in Germany, the Netherlands, Luxembourg, France, Denmark, Sweden, Norway, Finland and Austria ahead of the issue. We hit the road in two two-person teams and held more than 50 investor meetings in this time. Each of the two teams featured experts on capital markets as well as on real estate financing – something that was met with particularly positive feedback by investors. We were therefore able to provide information about every property in our portfolio and every location. As it turns out, investors who focus on sustainability ask very detailed questions about the portfolio, resulting in very lively discussions. Investors were very receptive to the fact that being “green” plays an instrumental role throughout our entire value chain.

 

What was the day of issue like?

There was also a hint of tension in the air on the day of the issue, of course. But that sort of thing is normal with a premiere of this nature. We received more than 50 orders within the offer period, meaning the issue was more than two times oversubscribed. Many of the investors have a very strong focus on sustainability, allowing Deutsche Hypo to further expand its investor base. That in itself made the project worthwhile.

 

It has been a few months since the issue. What are the next steps right now?

Our new Green Bond Reports were published as of December 31,2017. The report is a service for our investors to help them get a wide range of interesting facts about the portfolio. For example, they can read about how much CO2 emissions were saved thanks to their investment in the Green Pfandbrief. In terms of issuing activities, we are currently planning to issue one benchmark green bond a year. We have also already been able to sell smaller private placements. Maybe one day we will even be able to issue a high-volume green bond as an unsecured bond, allowing us to cover the entire product range here too.