The Association of German Pfandbrief Banks (vdp) has established minimum standards for Social Pfandbriefe, which build on existing green and social standards, and proponents hope they will encourage standardisation and provide impetus to the sector.
The vdp announced the minimum standards on Tuesday. They follow the establishment of minimum standards for the Green Pfandbrief in August 2019.
“We are seeing a clear increase in demand for sustainable investments in the European financial markets,” said Sascha Kullig, head of capital markets and investor relations at the vdp and member of its management board (pictured above). “We are convinced that both Social and Green Pfandbriefe are going to play a more and more important role in the refinancing mix of Pfandbrief banks.
“Our minimum standards will give new impetus to the market for Social Pfandbriefe and provide potential new issuers and investors with guidance.”
Although social bond issuance boomed last year in conjunction with the response to the pandemic, so far only Deutsche Kreditbank (DKB) has issued a social Pfandbrief (although MünchenerHyp issued what could now be considered a proto-social Pfandbrief in September 2014).
“One of the effects of the pandemic has been that people appreciate how important are topics such as health and care and education, for example,” Uwe Jurkschat, head of funding and investor relations at DKB, told Sustainabonds. “Since momentum is growing, it’s very important that the social bond and social covered bond space becomes more standardised.
“After the financial crisis a lot of issuers reduced or cancelled the public sector business,” he added, “but there is now a chance for a revival of public Pfandbriefe and public covered bonds overall. This initiative – the first from a national covered bond association – therefore sends out an important message for the asset class.”
The minimum standards require, among other things, issuance to be based on the Pfandbrief Act and compliant with the Social Bond Principles (SBP). Examples given of eligible use of proceeds categories are:
i. Financially viable basic infrastructure (e.g, clean drinking water, sewerage, sanitation, transportation, energy)
ii. Access to basic social services (e.g, health care, education, vocational training)
iii. Affordable housing
iv. Job creation, including through SME financing and microcredits
v. Food security
vi. Socio-economic development and empowerment.
The minimum standards go beyond the Social Bond Principles in including a “do no significant harm” (DNSH) requirement: “The eligible assets and their positive social impacts should not counteract or have a significant negative impact on other sustainable objectives or aspects, e.g. of an ecological nature.”
This requirement reflects the EU Taxonomy’s DNSH approach, according to Sascha Asfandiar, senior manager in the vdp’s capital markets team.
“On the one hand, we have industry standards like the SBP,” he said, “and on the other, we have regulation but which relates to green topics -since the social topic is still developing. We also know that the Platform on Sustainable Finance is working on a recommendation on a social taxonomy to put to the European Commission this year, and we find it highly likely that the DNSH approach will also be relevant there.”
He noted that the Social Pfandbrief minimum standards also includes a requirement that is only relevant to covered bonds: like the Green Pfandbrief minimum standards, they require that eligible assets are flagged in the cover pool.
Issuers wishing to use the terms Green Pfandbrief and Grüner Pfandbrief have to commit to the vdp to meet the respective minimum standards to receive a licence to use the trademarked names, but although the association has trademarked Social Pfandbrief, it was unable to trademark Sozialer Pfandbrief, since it could be commonly used in other contexts in German.
However, Asfandiar said the vdp is confident that the minimum standards will prevail.
“We believe that Pfandbrief banks would not call something a social Pfandbrief if they do not fulfil these minimum standards, because it’s not only a legal matter, but also a matter of reputation.”
Composite image: Social Pfandbrief logo and Sascha Kullig; Original images source: vdp