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06 May 2021, 12:12
Sören Amelang Julian Wettengel

Germany aims to become global leader in sustainable finance with new strategy

The German government has presented its strategy to make the country a global leader in sustainable finance and help mobilise money for greening the economy. The Sustainable Finance Strategy proposes a “traffic light” system to identify green investment opportunities, announces the reallocation of nine billion euros in equities Germany holds in pension and welfare funds into green investments, and the plan to make sustainable finance the priority of Germany’s G7 presidency in 2022. [Update adds Germanwatch comment & Bundesbank criticism]

The German government has adopted its Sustainable Finance Strategy, which is geared at mobilising money for greening the economy and making the country an international leader in sustainable finance.

The strategy aims at steering public and private investments towards environmentally friendly activities, which is seen as a prerequisite for achieving a climate neutral economy. It also aims to address the increasing risks to the financial system resulting from climate change.

“Our Sustainable Finance Strategy includes a decisive change of course for the financial sector: climate action and sustainability become the leitmotif,” said finance minister and Social Democratic chancellor candidate Olaf Scholz. The financial market could move trillions of euros towards climate action and sustainability, which would help achieve the necessary socio-ecological transition much faster.

The goal of making the economy climate neutral before mid century will require massive investments, but the financial sector currently lacks clear rules on which activities count as sustainable. Up to one trillion euros would be needed across Europe by 2030 alone for achieving the bloc's emissions reduction targets and other goals formulated in its Green Deal, according to the German government's Sustainable Finance Committee (SFC). As public coffers do not hold nearly enough of that sum, aligning private investments with the targets would be vital.

The German financial sector is among the largest in the world and is crucial to the strong industrial base that underpins the country's prosperity. But despite Germany's longstanding experience with the energy transition, its financial sector is considered a latecomer to the concept of green finance. Many other countries have already adjusted their financial sectors to better address climate change and integrate other sustainable ESG (environmental, social and governance) criteria in financial operations, putting pressure on lawmakers in Germany to follow suit.

Sustainability “traffic light” system for green investment opportunities

The strategy’s goals are to promote sustainable finance in the EU and worldwide, help finance the sustainable transformation, improve risk management in the finance industry, strengthen Germany’s role as a financial location, and make the country a role model for sustainable finance within the financial system. It contains 26 individual measures. Among other things, it

  • envisages a sustainability “traffic light” system that makes it easier to identify green investment opportunities
  • wants to coordinate the traffic light plan with the EU if possible, but if it cannot move ahead quickly with the bloc it will start with Germany’s Federal Environment Agency (UBA)
  • plans to increase guarantees and export credit assistance for green projects
  • aims to reallocate nine billion euros in equities it holds in pension and welfare funds into green investments
  • plans to issue further German green bonds
  • seeks to streghten non-financial reporting requirements for companies
  • aims to make sustainable finance the priority of Germany’s G7 presidency in 2022
  • plans to push the European sustainable finance agenda & further develop EU taxonomy
  • aims to turn the government-owned development bank KfW into a “transformation bank”
  • aims to introduce a cross-ministry sustainable finance working group

Environment minister Svenja Schulze said that the strategy would become an important lever for the modernisation of the economy. “The financial market needs clarity about which investments will still be profitable in the future, and which will become too risky because they finance business models of the past,” she said. This is currently being debated at EU level, she added.

The European Commission last month presented its draft rules for a labelling system indicating what counts as a green investment. This so-called taxonomy for sustainable finance is the EU's landmark classification system for helping investors who want to put their money into environmentally friendly projects by distinguishing between "green" and "greenwashing". It is the world's first major labelling system that aims to make the financial system more sustainable. But the Commission has postponed the controversial decision of whether to label natural gas and nuclear power plants as green until later this year. Investments that are not included in the taxonomy are not prohibited. But they must not be labelled as green, which rules out funding from dedicated support programmes and sustainable investment funds.

NGOs call for more details as activists vote German central bank “Best Climate Killer 2021”

NGO Germanwatch criticised  the measures proposed in the strategy for largely remaining too “vague.” Many crucial details for the level of ambition remain unaddressed and would therefore only become apparent during implementation, said policy director Christoph Bals. “By the time improvements have to be made, we will have already lost valuable time.”

The same day that the government presented its sustainable finance strategy, Frankfurt-based climate justice activist group KoalaKollektiv awarded the German central bank Bundesbank the “Best Climate Killer Award 2021.” The group said the Bundesbank is blocking the European Central Bank's (ECB) policy on implementing the Paris climate change agreement. “The decisive factors were its unprecedentedly obstructive role in the Governing Council of the European Central Bank and the unconscionable interpretation of its mandate,” wrote KoalaKollektiv.

In a letter to climate activists published the same day, Bundesbank president Jens Weidmann called climate protection “one of the most pressing and challenging tasks facing our generation” and said that 2021 will be a decisive year for climate action. He said central banks can step up their efforts to protect the climate, but “it is also clear that central banks’ actions have to be in keeping with their respective mandates,” i.e. maintaining price stability when it comes to the Eurosystem.

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