Sustainability

Reflecting on what was said about ESG in Germany

Michael Strafuss, Country Head for Germany, reflects on ESG in Germany. He shares the key takeaways from expert speakers on this topic who joined us at a recent conference and workshop with customers.

Michael Strafuss, Country Head of Germany and Head of Sales for EEA at NatWest Markets N.V.
1. Transitioning to net zero – the corporate perspective

You can’t necessarily wait for others to help you tackle your challenges; often, you need to go ahead and simply be entrepreneurial about it.

Digitalisation and electrification will go hand-in-hand on the journey to decarbonising transport, Alexander Hunger, Senior Investor Relations Manager at Volkswagen AG, and Thomas Küter, Debt Capital Markets, Volkswagen AG, explained. With VW’s new Group strategy “NEW AUTO – Mobility for Generations to Come”, the vehicle manufacturer aims to transform into to a world-leading, software-driven mobility provider, offering alternative transport solutions to single car use, such as car sharing or shuttle bus services. 

 

“You can’t necessarily wait for others to help you tackle your challenges; often, you need to go ahead and simply be entrepreneurial about it”, was Hunger’s and Küter’s message to the participants asking how VW can help boost the expansion of charging stations for electric vehicles across Germany and Europe. While plans had been made on national, regional and municipality level to increase the number of stations, progress was too slow. In Europe for example, VW solved the dilemma by founding a joint venture with other automobile companies to build a high-power charging station network across the continent and the company also offers home charging solutions for its customers via its subsidiary Elli.    

 

Furthermore, Hunger and Küter stressed the importance of understanding that reducing carbon emissions also includes looking at the whole life cycle of a product and the greenhouse gases (GHG) emitted during every phase from production to consumption. Recycling, of course, plays a key part, with the two speakers pointing to the re-usage of batteries in electric vehicles, which can help with storing renewable energy and supplying it to smart grids after their original usage in cars. Furthermore, technologies exist to extract raw materials (such as nickel, cobalt, magnesium and lithium) when the batteries’ lifespan comes to an end.      

 

The VW representatives also pointed to the challenge of getting suppliers to share the same ESG approach, with many smaller suppliers lacking the understanding. This leaves bigger corporates with the task to educate and to incentivise their suppliers to become ESG-compliant.

2. ESG – what consumers demand

The 17 UN Sustainable Development Goals (SDGs) are the roadmap for our future.

The 17 UN Sustainable Development Goals (SDGs) are the roadmap for our future,” Dr Ankathrin Förster, Marketing and Sustainability Consultant, concluded after analysing how consumer attitudes have shifted over the past years. Whether environmental, social or governance concerns: today’s consumers demand answers to questions about a company’s environmental practices, its energy use, its impact on biodiversity and its strategy to minimise carbon emissions. Equally, consumers want to know how a firm treats its employees, how it promotes gender equality and diversity, and whether a framework and governing body exists that guarantees effective controls and ensures that risks are assessed and managed. 

 

At the same time, consumers have easier access to information and are willing to take a stance and boycott those companies that don’t adhere to the standards consumers expect from them, Förster emphasised. Hence, companies must embrace the dialogue with consumers and other stakeholders as well as initiate change to deliver what consumers want: preserving nature and building a just and more caring society.

3. Sustainable debt – how issuers need to prepare

To cut through the complexity and to ensure you engage with all stakeholders, you not only need additional resources but especially people with the willingness to push forward and promote change.

“To cut through the complexity and to ensure you engage with all stakeholders, you not only need additional resources but especially people with the willingness to push forward and promote change”, stated Dr Kirsten Häger, Head of Sustainable Finance, in the Ministry of Finance of North Rhine-Westphalia, the first German state to adopt a sustainability strategy implementing all of the UN’s 17 SDGs. 

 

Laying out how North Rhine-Westphalia has gained its reputation as a sustainability leader by re-evaluating each of its services, processes, contracts and development plans through a sustainability lens, Häger focused on the advantages and challenges of financing sustainability projects. Becoming the first German state in 2015 to place sustainability bonds, raising money for environmental and social projects, the finance ministry faced a steep learning curve, Häger said: “Providing the required ESG data and outlining your sustainability narrative alongside your credit story prior to your issuance does take time. In addition, it means implementing new reporting processes and methods to capture and analyse ESG relevant data.” 

 

However, the sustainable finance expert highlighted that having started early with sustainable debt issuances has come with clear benefits: apart from the positive reputation as a sustainability leader it has helped the state to expand its investor base, particularly amongst ESG investors, and the interest rates for these bonds have been lower compared to conventional bonds. With the pressure rising for both the public and private sector to achieve net zero and investors scrutinising issuers’ strategies for achieving this, Häger commented: “Becoming sustainable is not only the right thing to do; it also makes business and financial sense.”

4. ESG – the investor angle

ESG is fast becoming a must have. And while ESG, green and social funds clearly focus on ESG, we do expect ‘normal’ funds to incorporate ESG criteria as well.

“ESG is fast becoming a must have. And while ESG, green and social funds clearly focus on ESG, we do expect ‘normal’ funds to incorporate ESG criteria as well,” Alexander Froschauer, Head of Fixed Income Germany at AXA Investment Managers Deutschland, stated, highlighting the demands from investors towards issuers, leaving hardly any hiding places for those still ignoring the expectation to apply environmental, social and governance considerations to their business. 

 

With €15 billion already invested in impact bonds and a target of €25 billion Green Investments by 2023, Froschauer outlined the specific methods the investment firm uses to identify good ESG practices. 

 

Interestingly: AXA’s best-in-class approach, whereby the bottom 20% of issuers per sector in terms of ESG performance are removed from the investible universe – with the hope of encouraging best practice by calling out non-performers. At the same time, investors are realistic and appreciate that companies won’t change overnight, Froschauer said. Therefore, showing the journey to sustainability matters as much as the achievements.

 

The investment expert also reiterated the need for global standards for what constitutes good environmental, social or governance practice. While the EU Taxonomy, with corporates obliged to start disclosing their EU Taxonomy-eligible activities from 2022, marks a huge step forward in more easily identifying environmental performance, the EU’s decision to define nuclear and gas-fired power plants as sustainable – a highly debated decision – might well lead to investors turning to individual approaches again to assess ESG performance. As a consequence, issuers will have to try to fulfil different expectations amongst the investor community.

5. Regulatory changes in Europe – an opportunity?

Regulation helps to clarify how to report and provides guidance about the data that needs to be sourced and analysed.

The focus of the presentation from Christoph Strasser, Co-CEO of Pacifico Renewables Yield AG, and David Stein, Head of Sustainability at Pacifico Renewables was how to turn regulatory changes and challenges into an opportunity. Participants were encouraged to take advantage of regulation, such as the EU-Taxonomy and the EU Corporate Sustainability Reporting Directive (CSRD), which both can help increase the transparency of corporate sustainability performance. Regulation helps to unify corporate sustainability reporting standards and provides guidance about the data that needs to be sourced and analysed, overall making it more straightforward for companies to present their path to sustainability and their achievements – and “for truly sustainable companies to stand out”.

 

Strasser and Stein also outlined how Pacifico Renewables, which operates a diversified portfolio of onshore wind and solar plants and published its first sustainability report in 2021, has integrated the EU-Taxonomy into its acquisition process by carrying out internal EU-Taxonomy alignment assessments and uses the EU-Taxonomy to identify climate risks of its existing plants and potential acquisitions.

6. The role of carbon credits – how COP26 has changed voluntary carbon markets

With carbon credit platforms also undertaking the due diligence of the quality of carbon credits, the often tricky and overwhelming task of choosing suitable credits will become much easier, allowing companies and organisation not only to achieve net zero but to also potentially become carbon positive.

Caroline Haas, Head of Climate and ESG Capital Markets, NatWest Markets, looked in more detail at the positive news that had come out at last year’s COP26 around the use of voluntary carbon credits: governments agreed on a much-needed rulebook for the voluntary carbon markets (VCM) and officially authorised the use of carbon credits in those voluntary markets. “This agreement has significantly improved the integrity of the voluntary markets, and the focus can now move to building a functioning infrastructure and improve access for buyers and sellers in this still young and evolving market,” Haas said, also pointing to the COP26 decision to award 5% of all carbon credit sales to developing countries to support their climate adaptation measures.  

As many corporate and institutional decision makers realise that they require carbon credits for those carbon emissions they can’t reduce to zero, the global VCM market volume is expected to rise to about £100 billion, with several carbon credit platforms bringing together buyers and sellers. Haas gave the example of the ‘carbonplace’ platform, the world’s first voluntary carbon marketplace, which NatWest has launched in partnership with other banks. Carbonplace facilitates reliable and secure trading of voluntary carbon credits and, among other features, allows buyers to view the price history of available carbon credits as well as all documentation relating to their quality and integrity. 

 

Haas’s positive conclusion: With carbon credit platforms also undertaking the due diligence of the quality of carbon credits, the often tricky and overwhelming task of choosing suitable credits will become much easier, allowing companies and organisation not only to achieve net zero but to also potentially become carbon positive while supporting geographic regions impacted by climate change.

 

Want to know more about ESG and stay up to date?

To learn more about ESG and stay up to date on ESG developments, please visit our ESG hub, which offers extensive insights into ESG regulatory developments, ESG market trends and ESG transactions in the Capital Markets; and make sure to read the monthly ‘Corporate ESG Briefing’, our “What-you-need-to-know-about-ESG” compendium for corporate decision makers.

About NatWest in Europe

 

We have a comprehensive European proposition in place, predominantly for our core commercial, corporate and institutional customers, prioritising what matters to them, and assisting with their day-to-day activities as much as with strategic advice and financing expertise.

 

In 2021, we announced our plans to create a ring-fenced entity in Europe, which allows us to maximise our ability to support UK customers as they seek to increase economic activity and investment in Europe. 

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