20 Mar 2020, 17:00

High-profile advisory group lays out proposals for Germany's sustainable finance push

Germany's government aims to make the country the leading location for a sustainable financial system. In order to establish a coherent strategy for aligning public and private investment decisions in the country with international climate and sustainability targets, Germany has set up a Sustainable Finance Committee of experts from the financial sector, business, science and civil society in 2019. The committee has presented a first interim report with initial priorities and fields of action that is open for consultation and supposed to pave the way for a final advisory report by the end of 2020. This factsheet explains how the committee was set up and outlines its main findings.

Why was the committee launched?

The Sustainable Finance Committee (SFC) was launched in June 2019 by the German government based on a decision by the country's State Secretary Conference for Sustainable Development. According to the World Economic Forum's Global Risk Report 2020, seven out of the ten biggest risks of the near future are related to sustainability. The financial sector is seen as a pivot that can simultaneously dry up the funding of unsustainable economic activities and channel money into more environmentally-friendly alternatives.

The SFC's main objective therefore is to advise the government in drafting and implementing a comprehensive policy strategy that will make Germany "a leading sustainable finance location" and support it in achieving the United Nations’ Sustainable Development Goals (SDGs) as well as the emissions reduction targets outlined in the Paris Climate Agreement.

The SFC also aims to strengthen Germany's role in drafting the European Union's Action Plan on Sustainable Finance, which according to the committee's first interim report "did not take on a leading role appropriate to the country’s position" within the EU.

Germany's Sustainable Finance Committee: Chairs / Members / Observers

Chairs

Chair: Karsten Löffler (Frankfurt School of Finance & Management)

Vice Chair: Kristina Jeromin (stock exchange Deutsche Börse Group)

 

Members

Asset Manager and Asset Owners

Deka Investment GmbH

Silke Stremlau - Hannoversche Kassen

Wiebke Merbeth - BayernInvest Kapitalverwaltungsgesellschaft mbH

Michael Schmidt - Lloyd Fonds AG

Matthias Stapelfeldt - Union Investment Management Holding AG

Banken/Credit institutions

Helge Wulsdorf - Bank für Kirche und Caritas eG

Frank Sibert - BNP Paribas

Gerald Podobnik - Deutsche Bank AG

Frank Scheidig - DZ Bank AG

Rolf Tegtmeier - Kreissparkasse Köln

Georg Schürmann - Triodos Bank N.V. Deutschland

Fintech/Index providers

Christian Vollmuth - Solactive AG

Rating agencies

Robert Haßler - ISS-oekom

Clara Mokry - Scope SE & Co. KGaA

Real economy

Ulrike Bastian - BMW Group

Lothar Rieth - EnBW AG

Stefan Haver - Evonik Industries AG

Joachim Goldbeck - Goldbeck Solar GmbH

Klaus Wirbel - REWE Group

Daniel Schleifer - ThyssenKrupp AG

Insurance companies and pension funds

Katharina Latif - Allianz SE

Michael Menhart - Münchener Rückversicherungs-Gesellschaft AG (MunichRe)

Andreas Hilka - Pensionskasse der Mitarbeiter der Hoechst Gruppe VVaG

Guido Bader - Stuttgarter Lebensversicherung a.G.

Thomas Diekmann - VHV Allgemeine Versicherung AG

Science

Karsten Neuhoff - Deutsches Institut für Wirtschaftsforschung e.V. (DIW)

Alexander Bassen – University of Hamburg

Civil society / Special players in sustainable finance

Karin Bassler - Arbeitskreis Kirchlicher Investoren i.d. ev. KD (clerical investors)

Gerhard Schick - Bürgerbewegung Finanzwende

Nico Fettes - CDP (Carbon Disclosure Project)

Kai Lindemann - Deutscher Gewerkschaftsbund (labour union association)

Angela McClellan - Forum Nachhaltige Geldanlagen

Christoph Bals - Germanwatch

Antje Schneeweiß - Südwind

Regine Richter - urgewald

Matthias Kopp - WWF Germany  

 

Observers

Financial industry associations

German Banking Industry Committee (GBCI)

German Association for Investment and Asset Management (BVI)

German Insurance Association (GDV)

German Association for Occupational Pensions (aba)

Supervisory authorities / Government agencies / German federal development banks

Federal Financial Supervisory Authority (BaFin)

Deutsche Bundesbank

German Environment Agency (UBA)

KfW Banking Group

Real economy

Association of German Chambers of Industry and Commerce  (DIHK)

Federation of German Industries (BDI)

Civil society

German Council for Sustainable Development

How does the SFC function?

The committee brings together representatives of the banking and asset management industries, the stock exchange, rating agencies and insurance companies, as well as members of civil society organisations, research institutions and non-financial companies from the "real economy."

Beyond its general meetings, the SFC operates in four separate working groups that prepare detailed proposals on the topic clusters "strategy and communication," "financial market stability and risk management," "disclosure, transparency and impact," and "end customers."

The committee’s mandate lasts until the end of the current legislative period, which is scheduled to end in autumn 2021. It reports to the Federal Ministries of Finance (BMF), Environment (BMU) and Economic Affairs and Energy (BMWi). After issuing its first interim report (in English) in March that serves as a basis for further consultations with stakeholders, the final sustainable finance strategy is scheduled for completion by autumn 2020.

What are its main objectives?

Climate change and other sustainability challenges come with the dual risk of causing both direct and indirect disruption to the economy. First, by immediate physical consequences to society and the economy, such as those caused by extreme weather events; and second, by political, technological and social reactions that overturn existing practices, for example the shift from fossil fuels to renewable energy sources. The SFC concludes that severe disruption can only be avoided through systemic responses and collaboration across sectors, and not by merely establishing "sustainable parallel structures" and limiting work to the regulation of financial products.

Its stated aim therefore is to not only weather the storm, but to make Germany a leading location for bringing together companies and financial market actors on a sustainability platform that adequately addresses business risks and generates opportunities for investors. The committee said this approach would be regarded as successful if "financial market players and governments worldwide see the German sustainable finance strategy as ambitious in its goals (…) and therefore that the strategy is considered relevant to the decisions they make with respect to their own activities."

For the "great transformation" to succeed in the relatively short timeframe set by the objective to reduce greenhouse gas emissions to net zero in a matter of just three decades, the financial sector has to fulfil its role as an efficient allocator of funds in a targeted manner. This can only be achieved if the financial actors are both enabled and bound to source and apply relevant data that goes beyond their traditional scope of immediate profit-seeking and risk minimisation.

What are the major obstacles?

A crucial challenge in gauging the effects of sustainability strategies lies in providing scientifically operational data that makes observing and comparing developments possible. "This will serve as the touchstone for measuring whether the financial sector does its part to serve sustainability goals," the SFC said.

Within the current regulatory framework and on the basis of existing metrics, a shift towards more sustainable business practices in finance and beyond is unlikely to come about. Or, as the SFC put it, "market forces alone do not generate the broad momentum necessary for realigning existing production and consumption patterns with the required speed and determination."

How is the committee supposed to help climate policy?

In its interim report, the SFC lists over 50 measures to make Germany's financial sector more sustainable and competitive for the expected shift in international financial markets. The measures are organised around the key concepts of resilience (making the financial sector's structure more robust and adaptable); transformation (the process of macro-social change towards a more sustainable target state); and transparency and disclosure (provision of relevant data for gauging progress on sustainability goals).

The committee identified three main target groups that its advice is aimed at: government and public sector institutions; financial market actors; and companies from the real economy. The following lists contain selected measures recommended for each group:

Government / Public Sector

Apart from setting the regulatory framework and providing incentives for targeted investing, the government ought to fully appreciate its function as a role model for the financial system's transformation and act accordingly in its various positions as customer, creditor and investor. "Without intervening in the market via regulations, the public sector’s impact can be significant on account of the signalling effect its actions have on other financial market players," the committee said. The precondition for this to succeed, it added, is "a well-developed understanding whether its own actions are consistent with its political goals."

  • The public sector should use special caution regarding the transparency of its own investments and align all of its portfolios to the example set by Norway's national pension fund
  • Development of a coherent approach by the government and subordinate public institutions, such as the financial regulatory authority BaFin, the semi-public savings banks (Sparkassen) or the German central bank (Bundesbank), to allocate budgets, set economic incentives and provide guidelines that facilitate compliance with EU climate and sustainable finance targets
  • Creation of a coordination hub at the finance ministry to synchronise incentives and regulations with the environment and economy ministries as well as measures taken at the federal and state level
  • Creation of a dialogue platform based on approaches by sustainability rating agencies to provide transparent guidance for decision-making to the private sector, possibly under direct supervision of the SFC
  • Introduction of a CO2 price for all sectors as well as sector-specific policies that allow for the implementation of "non-disruptive roadmaps" and warrant investment security
  • Inclusion of sustainability parameters in risk management for institutional investors and (private and public) credit institutions, and development of sustainability-related stress tests
  • Introduction of a mandatory financial product classification system based on the taxonomy included in the EU Sustainable Finance Action Plan that shows the degree of compatibility with the UN SDGs and the Paris Climate Agreement
  • Making compliance a prerequisite for export credit guarantees issued to private companies by the state as well as for investment guarantees
  • Inclusion of sustainable finance in training programmes for commercial and financial executives and in relevant university programmes
  • Setting up an online information portal for end customers to ensure that independent basic education on sustainable finance products is freely available

Financial Market Actors

  • Financial market actors are required to develop investment, banking and insurance products that facilitate sustainable decisions by private and institutional investors and help disclose risks by increased transparency and management standards. They should be made subject to revised disclosure requirements to allow investors and creditors to get a "realistic view" of certain products' and investments' degree of sustainability
  • Requirements should be made comparable with transparency rules for companies of the real economy, meaning that, for example, data on CO2 emissions provided by industrial companies can be directly translated into the footprint of financial companies cooperating with them
  • Credits in excess of one million euros as well as all investments in securities should be automatically made subject to their compliance with the taxonomy
  • Institutional investors should exercise their voting rights at general meetings within the scope of sustainability targets and report on their voting behaviour

Non-financial Businesses

Companies in the real economy, which are responsible for by far the most emissions and rely on funding through financial markets, need to be made aware of the long-term dangers lurking in unsustainable investments and have to improve their data recording to make sustainability efforts comparable.

  • Ensure that disclosure and transparency rules for sustainability reporting are internationally accepted and applied to the greatest possible extent but at least within the EU to provide a high degree of standardisation and comparability
  • Comparability should be augmented through a set of sustainability indicators (possibly customised to individual sectors of the economy), which rests on a further set of standard indicators, such as a given investment's specific CO2 emission. The committee insists that the total number of indicators should be kept "manageable" and as small as possible to ensure better understanding and application
  • Establish a "plausible methodology" for company reporting on "forward-looking sustainability information, especially on the influence and impact of climate change" based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). This should be achieved by gradually expanding reporting obligations to include a medium and long-term perspective
  • Due to the great importance small and medium-sized enterprises (SMEs) have in the German economy (the so-called "Mittelstand"), the committee calls for "encouraging" smaller businesses to also establish standardised reporting mechanisms. "Efforts to turn Germany into the leading centre for sustainable finance also depend on whether all key players in the country commit to these guiding principles and participate in establishing and expanding the country’s envisioned role." The national chamber of commerce (DIHK) and financial market actors that cooperate with SMEs, such as the semi-public Sparkassen or cooperative banks, should assist companies in achieving compliance
  • Construction and real estate companies form a particular class of the real economy from a financial perspective. About half of all loans given to end-customers are used for real estate purchase or development. At the same time, buildings account for about 30 percent of Germany's total energy demand. The central registration office for energy performance certificates at the German Institute for Civil Engineering (DIBt) should be developed further into an electronic database with free access for commercial users. Better databases should allow creditors to gauge the financial performance of real property as a function of transitional risks, such as increasing carbon prices or efficiency standards.
  • Companies are called upon to provide so-called materiality reports (to identify environmental, social and governance, i.e. ESG risks) but given leeway in implementation in order to foster a "competition of methods" to identify best practices
  • Introduction of regulation that obliges all listed companies in Germany to implement recommendations made by the TCFD by 2022.
  • Regulatory assistance for smaller, non-listed companies to establish disclosure standards and data collection similar to the TCFD standards for larger companies (in cooperation with industry associations, chambers of commerce, etc.). The committee says if Germany manages to find an effective mechanism for establishing these practices in smaller businesses, it could serve as a template that becomes emulated internationally.

What do critics say about the committee's work?

The German Banking Industry Committee (DK) criticised the committee for trying to establish a national architecture for sustainable finance in addition to parallel to EU efforts, saying such an endeavour would achieve "exactly the opposite" to the aim of achieving more transparent and sustainable investment decisions. Germany's financial industry would be dealt a competitive disadvantage if rules are tightened single-handedly and without Europe-wide standards. Moreover, the DK said market mechanisms should determine which sustainable finance products gain acceptance, rather than imposing them individually in all product categories.

The German Property Federation (ZIA) said the SFC has to make sure to avoid "overregulation" and not go beyond what is agreed at the European level. ZIA argued a high level of ambition at the national level posed the risk of "undermining" a joint EU solution.

Environmental NGO WWF Germany said the government must clarify its level of ambition for a sustainable financial system for the SFC to be effective. The first interim report called for aligning public investment and budgets with the targets of the Paris Climate Agreement, an approach in which countries like the UK or the Netherlands already are much more advanced, WWF said.

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