The Sustainable Investment Approach for KfW‘s Liquidity ......4 Current sustainability ratings of KfW › Sustainalytics: 85 points out of 100, second rank among 343 banks worldwide

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The Sustainable Investment Approach forKfW‘s Liquidity Portfolio

April 2017

Germany and Europe face challenges from megatrendsKfW is fully committed to the concept of sustainable development

KfW's Sustainable Investment Approach / April 2017

For us, entrepreneurial activities and social responsibility go hand in hand. Through its financing activities, KfW supports the improvement of economic, ecological and social living conditions at the local, national, European and global level with a view to contributing to sustainable development. For us, sustainability means the establishment of viable, self-sustaining economic structures.

Globalisation / technical progressGlobalisation / technical progress

DemographicchangeDemographicchange

Environmental and climate protectionEnvironmental and climate protection

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Sustainability approach at KfW

KfW Group

KfW – Sustainability principles

Declaration on respect for human rights in KfW’s business activities

Data based on new business 2016

Demographic change

Environment and climate protection

Globalisation /technical progress

Trend-independent promotional topics

12%

44%

18%

26%

In-house environmental protection

Responsible procurement

Stakeholder dialogue & staff

Sustainable portfolio management

Public CorporateGovernance Code

Broad sustainability management system

Prevention of corruption and money laundering

KfW Foundation

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Sustainable Banking

OperationsLending Business Governance & CSR

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Current sustainability ratings of KfW

› Sustainalytics: 85 points out of 100, second rank among 343 banks worldwide

› Oekom Research: „Prime“ mark-up among the group of best-rated financial institutions. The

sustainability rating is C+ (on a scale ranging from D- to A+)

› imug: Rating BBB on a scale ranging from AAA to D. KfW is among the top 9 out of 109 assessed

financial institutions

90 scores

Stand: 19.04.2017Disclaimer: The ratings given here are opinions of various rating agencies. KfW assumes no liability for their accuracy, validity or timeliness. The information published here isintended for the general information of our investors and is not a recommendation to buy, hold or sell KfW bonds.

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The UN-PRI initiative

Principles forResponsibleInvestment

› A financial initiative of the United Nations Environment Programme (UNEP)

and the UN Global Compact

› Development of a framework for responsible investing

6 principles

› Integrate the consideration of environmental, social and governance (ESG)

issues into investment decision-making

› Transparent communication and raising awareness on sustainability issues

in the capital market

Signatories

› Currently more than 1600 institutional investors, asset managers and

financial service providers – 61 from Germany

› More than USD 60 trn assets under management


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Elements of KfW‘s sustainable investment approach

1. ESG-Integration 3. Engagement2. Exclusion Criteria

Exclusion criteria substantiallybased on the IFC Exclusion List

› Best-in-Class approach: Only investment in bonds of issuers whose sustainability score is among the best 80% of the respective sector.

› The sustainability evaluation is based on sustainability ratings provided by a sustainability rating agency.

› Investments only in bonds from issuers who are in compliance with the exclusion list

KfW's Sustainable Investment Approach / April 2017Picture credits: KfW-Bildarchiv / photothek.net

Sector

› The sustainability rating of an issuer is crucial for a potential bond investment.

› Dialogue with the issuers on a regular basis

KfW’s liquidity portfolioaround EUR 25 bn

Goal

› Securing KfW‘s liquidity

› Sustainableinvestment

Strategy

› Pure fixed incomeportfolio

› Buy-and-hold strategy

› Risk managementvia rating and termdiversification rulesand bankwide singleborrower limitframework

Asset classes

› Government bonds

› Covered bonds

› Financials

› Bonds issued bygovernment-relatedissuers and agencies

› ABS


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Outlook

› Introduction of the new best-in-class approach: send out a powerful signal to the issuers

› Engagement: intensify communication and dialogue with issuers

Collaboration in the PRI-workstream „Fixed Income“

Work together with other PRI signatories regular meetings of the German PRI network

Enhance sustainability practices of issuers and capital market participants!


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Contact


Treasury

Doris Kramer

Investment Strategies,

Sustainability

Ext.: - 3531

[email protected]

Marion Marinov, CFA

Investment Strategies,

Sustainability

Ext.: - 4131

[email protected]

KfW Bankengruppe

Palmengartenstrasse 5-9

60325 Frankfurt am Main

Phone +49 69 7431 - Exthttps://www.kfw.de/nachhaltigkeit/KfW-

Group/Sustainability/Sustainable-

Banking-Operations/Sustainable-

Investment/2016_Sustainable-

Investments.html

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Annex: The 6 PRI principles

We will incorporate ESG issues in investment analysis and decision-

making processes

We will each report on ouractivities and progress towards

implementing the Principles

We will promote acceptance and implementation of the Principleswithin the investment industry

We will work together to enhanceour effectiveness in implementing

the Principles

We will seek appropriatedisclosure on ESG issues by the

entities in which we invest

We will be active owners and incorporate ESG issues into ourownership policies and practices


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Annex: ESG (Environmental, Social and Governance ) criteria fornon-governmental issuers

Environment

› Formal environmental policy

› Environmental managementsystem

› Programmes and targets toreduce GHG emissions

› Programmes and targets toincrease renewable energy use

› Carbon intensity trend

› % primary energy use fromrenewables

› Environmental & socialstandards in credit and loanbusiness

› Sustainable financial services

Social

› Policy on freedom of association

› Formal policy on the elimination of discrimination

› Programmes to increase workforce diversity

› Employee turnover rate

› Activities in sensitive countries

› Employee incidents

› Collective bargaining agreements

Governance

› Policy on bribery and corruption

› Whistleblower programmes

› Signatory to UN Principles for Responsible Investment

› ESG reporting standards

› Policy on money laundering

› Disclosure of directors‘ remuneration

› Board independence

› In-house team dedicated to responsible investment/finance


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Annex: ESG (Environmental, Social and Governance ) criteria forsovereign issuers

Environment

› Land degradation

› Air pollution

› Trend total annual CO2 emissions

› Percentage of energy from renewable sources

› Coal use

› Ocean health

› Water productivity

› Risk exposure to natural disasters

Social

› Education

› Infant mortality

› Food security

› Level of peace

› Gender equality

› Income equality

› Child labour

› Political rights

› Youth unemployment

Governance

› Voice and accountability

› Rule of Law

› Government effectiveness

› Regulatory quality

› Agricultural regulation

› Habitat protection

› Sustainable energy

› Expenditure on education and healthcare

› Treaties and conventions


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Annex: Exclusion criteria for non-governmental issuers


1. Production or activities involving harmful or exploitative forms of forced labour or child labour as defined in the ILO

core labour standards.

2. Production, use of or trade in pharmaceuticals, pesticides/herbicides, chemicals, ozone depleting substances and

other hazardous substances that are subject to international bans.

3. Trade in animals or animal products that are subject to the provisions of CITES (Convention on International Trade

in Endangered Species of Wild Fauna and Flora).

4. Production of cosmetics etc. involving testing on animals.

5. Commercial logging operations for use in primary tropical moist forests.

6. Production of wood or wood products other than from sustainably managed forests (enterprises with less than 50%

FSC-certified production are excluded, FSC – Forest Stewardship Council).

7. Production or trade in controversial weapons or important components for the production of controversial weapons

(anti-personnel mines, biological and chemical weapons, cluster bombs, radioactive ammunition, nuclear weapons).

8. Production or trade in tobacco.

9. Drift net fishing in the marine environment using nets in excess of 2.5 kilometers in length.

10. Controversial forms of gambling: operation of casinos, production of devices or other equipment for casinos or

betting offices or companies that generate turnover via online betting. (So-called "short odds" are defined as

"controversial forms of gambling").

11. Any business activity involving pornography.

12. Production or distribution of racist, anti-democratic and/or neo-Nazi media.

Documents

The Sustainable Investment Approach for KfW‘s Liquidity ......4 Current sustainability ratings of KfW › Sustainalytics: 85 points out of 100, second rank among 343 banks worldwide