04 Jan 2021, 14:26
Benjamin Wehrmann

Preview 2021: Making finance truly sustainable “is not easy, but can be done”

Bank towers in Germany's financial centre Frankfurt am Main. Photo: Commerzbank
Bank towers in Germany's financial centre Frankfurt am Main. Photo: Commerzbank

The transformation of the German and European economies will become more tangible in 2021, as new technologies, policies and business models begin to have an effect, Karsten Löffler, head of sustainable finance at the Frankfurt School of Finance and Management and member of the government's green finance advisory committee, says in CLEW's Preview 2021. He argues that better integration of green and sustainable finance principles and practices are crucial for mastering this decades-long process, but doubts that the complex topic will make more headlines for the broader public this year. However, progress on technical aspects of reconciling finance with sustainability at the EU level give reason for optimism that financial professionals are at least starting to fully appreciate that systemic changes are inevitable, he said.

Clean Energy Wire: With the Coal Exit Law, the introduction of CO2 pricing and other measures included in the Climate Action Programme 2030, Germany made several key decisions in climate and energy policy in 2020. Which topics do you think will shape the debate in 2021 - and where does sustainable finance come into play?

Karsten Löffler, Head of the UNEP Collaborating Centre for Climate & Sustainable Energy Finance at the Frankfurt School of Finance & Management.

Karsten Löffler: Turning political, climate and sustainability goals into action will take centre stage in 2021, and will be debated in the public sphere and in private companies alike. But the transition to a sustainable, climate-friendly economy that affords basic human rights will take some time. It will mean a decades-long change in the way we do business. And in this respect, sustainable finance will become more important.

Financial institutions will require more transparency on sustainability risks. They will also have to show the positive impact of their loans and investments. Supervisory authorities have already signalled they want to better understand macro-economic sustainability risks to financial-market stability, for example from global heating. Financial institutions will be required to capture and manage those risks.

Taxes, indebtedness, credits and other financial topics are often a core component of election campaigns. Do you think that green and sustainable finance will for the first time make headlines during an election in 2021 in Germany? Why or why not?

Finance is, and will always be, a complex topic. Although news outlets have begun covering sustainable finance more closely, it is still not well understood by the broader public. Conveying financial market changes to the public will continue to be a challenge.

Supported by regulation, financial institutions are moving to a more comprehensive understanding of risks. For instance, they have begun to include sustainability-related risks in decision making. Risks that are often called ‘non-financial’ often turn out to be financially material. However, I doubt this will be enough to make headlines.

The coronavirus pandemic has been the defining event of 2020 and will without a doubt drag on well into 2021. The German government and the EU Commission have both pledged not to let climate action fall victim to the pandemic, and have promised to couple economic recovery measures with emissions reduction. Do you think this "green stimulus" effort could be a first litmus test for sustainable finance principles in Germany and the EU? And do you think it will be a success?

It is commendable that policymakers say climate action will not fall victim to the pandemic. We will see a goal-oriented, economy-wide transformation at an unprecedented scale. This needs significant financial resources from both public and – even more so – private pockets. Governments should combine efforts to fight the impacts of the pandemic with supporting the economy's transformation. For instance, we need electrification in areas where the use of fossil fuels still dominates. And we will likely see a huge shift to a hydrogen-based economy. For both, a fast-track expansion of renewable energies will be key. Channelling significant parts of recovery-related funds into future business models will kill two birds with one stone.

This does not come without challenges. Identifying business models is not always easy and they may not yet have the absorptive capacity to digest larger amounts. Business models yet to become sustainable will still need support. The EU Taxonomy is a good starting point for avoiding contradicting sustainability-related policy goals and for setting incentives accordingly. It can serve as a shopping list and indicator for sustainable activities. No one says that it’s easy, but it can be done.

The sustainable finance taxonomy is at the heart of the EU's plan to improve the climate impact of the financial sector, but appears to be stuck in the European trilogue and debates within and among member states. Do you think 2021 can bring a breakthrough in this regard? What needs to happen for this to occur, and what is currently holding it back?

The Taxonomy regulation was published in mid-2020. More details will be added in 2021. It will enter into force as of 2022. There is debate about what counts as sustainable economic activities. The regulation is very clear on the benchmark: net zero emissions by 2050 and intermediate goals. Accordingly, the EU’s Technical Expert Group put forward a comprehensive set of technical recommendations. The EU Taxonomy must remain science-based, coherent and predictable. The elephant in the room is that the EU Taxonomy is a transparency tool that is quiet about its application in other contexts. Accepting that lobbying focusses on applications of the Taxonomy other than the Taxonomy itself would result in a big push forward.

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