Minimum standards for Green Pfandbriefe

Pfandbrief issuers under the umbrella of the Association of German Pfandbrief Banks (vdp) have formulated minimum standards that Pfandbrief Banks must satisfy if they wish to issue “green” Mortgage Pfandbriefe or “green” Public Pfandbrief. They will give a further boost to the market for Green Pfandbriefe and provide useful guidance for active and potential issuers as well as interested investors. 

The German Pfandbrief banks are committed to the climate objectives and want to play their part in making sure that the carbon footprint can be reduced. As of 2019, the vdp has central responsibility for administering trademark rights to the “Green Pfandbrief” product for and on behalf of its member institutions. This will ensure rigorous ongoing development of the still young market segment. To this end, Pfandbrief issuers belonging to the Association and active in the segment have formulated minimum standards for the issuance of green Mortgage Pfandbriefe and green Public Pfandbriefe. The former are Mortgage Pfandbriefe secured by green real estate loans and the latter Public Pfandbriefe secured by public-sector financing operations that serve an environmentally sustainable goal. All provisions of the German Pfandbrief Act also apply to Green Pfandbriefe.

The standards for green Mortgage Pfandbriefe and green Public Pfandbriefe take account of the initiatives being formulated at EU level for the introduction of a “taxonomy” for sustainable economic activities and an EU Green Bond Standard. They include among other – requirements for the energy efficiency of financed buildings and oblige Pfandbrief banks to maintain a high degree of transparency. Investors can therefore rest assured that all Green Pfandbriefe meet high sustainability demands.

High degree of transparency

Transparency plays an important role in this respect since investors want to know what they are investing in. Pfandbrief banks are therefore committing themselves to publishing detailed information about Green Pfandbriefe. This particularly includes information on the qualifying assets in the cover pool, the issuer’s “Green Bond Framework” and the external opinion prepared by a qualified independent party. Issuers active in the Green Pfandbrief segment regularly publish all this information on their websites. (See Issuer Overview).

Green Bond Frameworks

The Green Bond Frameworks of Germany’s Pfandbrief banks are based on the Green Bond Principles of the International Capital Market Association (ICMA) which have become the market standard. The Principles call on issuers to set regulations on the use of issuance proceeds, individual project selection, revenue management and reporting. They therefore primarily set the framework for Green Bonds, while specific requirements are defined individually.<

Pfandbrief banks take quite different approaches at the micro level, but essentially in the case of green Mortgage Pfandbriefe the focus is on energy consumption and demand. For example, most banks have set upper limits for the energy consumption and demand of buildings, depending on the type of building. Energy Performance Certificates are often used as proof. However, since these are not always available, some issuers also allow the use of sustainability certificates showing that the property ranks in one of the top categories.

Another alternative is to require the property to be in the 15% of the national property stock with the lowest energy consumption or demand. For residential real estate, co-financing by KfW funding programmes for energy-efficient construction and renovation may also be used as a criterion.

Investors are interested not only in how banks use the issuance proceeds, but above all in the contribution their investments actually make to climate protection. Against this backdrop, impact reporting has become increasingly important. The minimum standards therefore include an obligation to draw up and publish an annual impact report. Investors’ increasing demands will be addressed by continuously improving impact reporting.

Continuous further development planned

Pfandbrief banks are also committed to the goal agreed at the 2015 Paris Climate Conference of limiting global warming to 2 degrees centigrade. According to the German government’s climate protection plan, the building sector is expected to reduce carbon emissions to around 70 million tonnes in 2030 and become CO2 neutral by 2045. The Pfandbrief banks can only have an indirect influence, since they do not build or renovate buildings themselves. What they can do, however, is create incentives for energy efficient buildings in financing such projects. This applies to both, commercial and residential real estate. As a result, a few Pfandbrief banks offer “green” real estate financings, whereby they offer their customers more favourable terms than with conventional real estate loans.

The same applies to public-sector financing operations that serve an environmentally sustainable goal. Here, too, Pfandbrief banks indirectly promote public projects in areas such as renewable energies, energy efficiency, pollution prevention, clean transport/mobility or sustainable (waste) water management.

Moreover, the minimum standards for Green Pfandbriefe are regularly reviewed and continually updated in order to achieve the long-term goals. This is done by a separate committee on which Pfandbrief banks already active in the segment are represented. The group also deals with issues relating to the Social Pfandbrief.

Regulatory considerations and industry initiatives taken into account

Regulatory developments in the area of sustainable finance are also taken into account. This applies in particular to the EU taxonomy for environmentally sustainable economic activities and the related technical criteria for environmentally sustainable activities that contribute to mitigating climate change.

The minimum standards are also geared to the EU Green Bond standard and linked to the “Energy Efficient Mortgage Initiative” of the European Mortgage Federation/ ECBC. The aim of the initiative is to establish green real estate financing in Europe whilst at the same time improving the data situation. An analysis will also be carried out to determine whether green real estate financing has a lower probability of default or loss given default than conventional financing. The vdp acts as a “national hub”, coordinating German efforts and participating banks.