Transitioning to net zero carbon – Germany’s Green Finance market

Tackling Climate Change” – a Virtual World Tour ahead of COP26: Germany - Part 3.

A few key questions remain - what measures exactly will Europe’s largest nation take to attract green investors and their capital? How far has Germany come in ‘greenifying’ its financial sector and establishing a vibrant sustainable debt market? And what role are the “three pillars” of the unique German banking system playing in integrating climate action into their domestic financial market?

In our third and last article about Germany we’ll shine a spotlight on the country’s financial sector, which some observers say “has yet to pull its full weight in contributing to a smooth continuation of the Energiewende and a rapid reduction of greenhouse gas emissions”[2].

This article focuses on Germany’s green finance market, and will cover the three “I":

  1. Institutional support for sustainable finance
  2. Issuance
  3. Innovation

Institutional support for sustainable finance

An ambitious Sustainable Finance strategy just in time for the September election campaign

With an estimated €1 trillion ($1.18 trillion) required across Europe by 2030 alone to achieve the EU’s emissions reduction targets (according to the final report of German government’s Sustainable Finance Committee (SFC)[3]), calls have been growing louder to urgently introduce effective measures to finally overcome the country’s ‘laggard’ status in sustainable finance.

In May this year, following in large part the recommendations of the SFC report, the German government adopted its long-awaited Sustainable Finance strategy[4]. Notable callouts include:

  • the introduction of a sustainability “traffic light” system – ideally to be coordinated with the EU – to help investors to more easily identify green investment opportunities,
  • an increase of guarantees and export credit assistance for green projects,
  • a plan for federal pension funds to gradually reallocate their equity investments, worth €9 billion, into green investments,
  • a plan to turn KfW, the government-owned development bank, into a “transformation bank”, and
  • the commissioning of a scenario study on physical climate risks for the real economy and finance in Germany[5]. 

Finance minister, Olaf Scholz, also confirmed the government will continue to help boost the European sustainable debt market via further green sovereign bonds with a plan to issue with longer maturities “so that a green federal yield curve can be established and become the benchmark in the green euro capital market”[6]. In 2021, Germany raised a similar amount via green bond issuances as in 2020, when it launched its first two green bonds with a combined volume of €11.5 billion ($13.57 billion): in May, the German Federal Government issued its first 30-year Green Federal Bond with a volume of  €6 billion ($7 billion) and tapped into the capital markets again in September with a 10-year €3.5 billion ($4 billion) Green Federal bond, which is scheduled to be reopened by a further €3 billion ($3.5 billion) later in October[7].

Finally, the new strategy also includes strengthening green governance and supervision: the Federal Ministry of Finance will develop a detailed concept this year around how the Federal Financial Supervisory Authority (BaFin) can be supported to expand its scope to green supervision. At the same time, BaFin will release a report by autumn 2021 for how it plans to enhance its cooperation with other federal institutions, including the Federal Environment Agency (UBA) and the Federal Office for Economics and Export Controls (Bafa).

Local greenification finally culminates in a concerted sector effort

Widely celebrated as a major milestone, some observers might have been surprised to hear that the largest economy in Europe hadn’t managed to instigate a proper Sustainable Finance campaign before. Indeed, while making headlines with its ‘Energiewende’ strategy and despite German corporates, municipalities, domestics development banks and real estate banks adopting Green Bonds as an effective vehicle to raise money for the energy transition and other green projects very early on, Germany hasn’t been as quick off the mark as other countries in promoting sustainable finance or compelling the country’s financial services sector to curtail CO2-intensive projects and instead fund cleaner alternatives on a large scale.

Only in 2016, when the German finance ministry warned in a report[8] that substantial climate policy changes, (such as that a higher CO2 price could significantly affect the value of its most important companies’ portfolios and inflict severe losses on the economy), the government acknowledged that a coherent policy and approach were needed to turn its finance sector green. This led to a pledge to work on a Sustainable Finance strategy, and to establish the Sustainable Finance Committee – with members from the financial and real wider economy, academia and civil society – to jointly develop this strategy.

However, the question remains – what has hindered an earlier green adoption by the sector? Some point to the country’s fragmented banking system; while Germany’s financial sector is among the largest in the world – contributing circa 4% of total domestic gross domestic product (GDP) 2019[9] – it has a fairly unique ‘Three-Pillar-Banking-System’ in which privately owned banks (such as the large commercial banks Commerzbank and Deutsche Bank and a number of smaller private banks) have coexisted for more than 200 years alongside banks marked by direct government involvement: the influential public ‘Landesbanken’ and ‘Sparkassen’, and the regionally focused ‘Volks- und Raiffeisenbanken’ (cooperative banks)[10].

With aggregate assets of about €1.2 billion ($1.42 billion)[11] and accounting for nearly two-thirds of company credits issued in Germany, the public and cooperative banks rival the biggest commercial banks and reach far more customers across thanks to their dense branch network. They also spearheaded the move towards green investments following the introduction of Germany’s Renewable Energy Act in 2000, which kick-started the Energiewende. In particular, by 2018, smaller investors coming through the Sparkassen and Volksbanken had invested over €271billion ($319.82 billion) in wind, solar and other clean energy sources[12], resulting in citizens, community cooperatives and SMEs owning more than half of Germany’s installed renewable energy capacity, while commercial banks and funds accounted for just 13,4% in 2017[13]. However, despite their key role in financing energy transition projects, the public and cooperative banks, regionally rooted, largely stuck to local green projects, and hence sustainable finance was unable to properly take off on a national level[14].

But change is in the air: the last couple of years have seen the sector marching towards green, with market players keen to join forces: a good example is the ‘Green and Sustainable Finance Cluster Germany‘ initiative, (which emerged in 2018 from the fusion of the Deutsche Börse‘s ‘Accelerating Sustainable Finance Initiative’ and the ‘Green Finance Cluster Frankfurt’ from the Hessian Ministry of Economics), to bundle sustainable finance activities of various stakeholders, including the country’s largest commercial banks and insurance firms, to realise synergies and achieve a faster, more efficient transformation of the industry[15].

Rising sustainable investment activity proves that the work is already paying off

Unsurprisingly, considering the niche status of sustainable finance in Germany, demand for green investments had been sluggish, while green investment opportunities remained fairly limited and regionally focused. However, the sector’s current drive to embrace sustainability is already bearing some fruit: sustainable investment activity rose considerably, 23%, to €270 billion ($318.64 billion) between 2018 and 2019 (still only representing a small market share of 5.4% of the country’s fund market in that year), and the influx into sustainably managed funds continued in the first three months of 2020, with German investors - steering €3.4 billion ($4.01 billion) into sustainable finance products between January and March, whereas public funds in the country saw total capital outflows of over €17 billion[17] ($20.06 billion).


Energy transition financing behind steady growth of German Green Bonds market

Meanwhile, Germany’s Green Bond market has shown steady growth over the past few years, driven by the financing need for the energy transition of German enterprise. In 2019, issuance volume was at €18.7billion ($22.07 billion), +144% from 2018, ranking Germany as the fourth largest market globally.

In 2018, financial institutions made up 43% of issuance in a clear rise from their 23% share in 2017. Nearly three-quarters of the volume came from mortgage banks, such as repeat issuer Berlin Hyp with its ‘Green Pfandbrief’, using investor money to refinance loans for green buildings[19]. Development bank, KfW, was behind another 25% of 2018 volume with the largest Green Bond (€1billion) of 2018, which KfW topped again in size with its €3 billion ($3.54 billion) green issuance in May 2019 – the largest German Green Bond to date[20].

Germany’s top issuers (including green, social and sustainability bonds) (Dealogic, July 2021)

In 2019, new green issuances in Germany jumped to €15.4 billion ($18.17 billion), +144%, on the back of 12 issuers, still remaining in fourth place of the top issuing countries. 2020 volumes of nearly $40.2 billion lifted the German market for the first time into the ‘top 3’ globally, behind the US with $51.1billion and ahead of France with $32billion[22].

German car manufacturer, VW, with a pair of green bonds totalling €1.8billion ($2.12 billion) to finance the development of its extensive electric vehicle programme[23], and even more so Germany’s debut green sovereign issuance in September 2020, raising €6.5billion ($7.67 billion) from a 10-year Green Bond[24], were behind the boost in volume.

A landmark moment for Europe’s Sustainable Finance market, investors had to wait five years for AAA-rated Germany to issue a green ‘Bund’ after Poland, in 2016, became the first country worldwide to kick off the market for Green Sovereign Bonds[25]. In contrast to others, like the Netherlands, Belgium or France, Germany announced that it plans to build a full yield curve, offering investors more options to ‘greenify’ their fixed income portfolio at several different points along the yield curve, while other countries and companies looking to sell their own Green Bonds can use Germany’s green yield curve as a reference point[26]. The green Bund programme is also equipped with a unique feature whereby investors can swap the Green Bonds for an otherwise identical conventional bond, to help mitigate any liquidity concerns[27].

However, the size of the German Green Bond market, isn’t only the product of a few corporate ‘one-offs’ and a (now) steady stream of green ‘Bunds’, but rather the result of corporate activity in the market picking-up: utility E.ON raised €1.5 billion ($1.77 billion) in 2019 using the proceeds for grid modernisation and energy efficiency projects, while utility EnBW issued Green Bonds worth €1.5 billion ($1.77 billion) in late 2018 and in 2019 to fund wind power, solar power and electric mobility projects. As one of the first industrial companies, automobile firm Porsche issued a green “Schuldschein” in August 2019 to finance the development of its electric car model ‘Taycan’[28].

Apart from Germany’s utilities, car manufacturers and development banks, market observers expect further growth through new Green Bond market entrants from the pool of fully or strongly climate-aligned German issuers (fully climate-aligned issuers derive 95% or more of revenues from ‘green’ business lines, while strongly-aligned issuers derive 75%- 95% of revenues from green business)[29], such as for example windfarm firm PNE Wind` or solar energy equipment supplier, CARPEVIGO[30].

Green bonds dominate sustainable debt market in Germany

Sustainable Bonds by instrument type 2019 – 2021 (Dealogic 2021)


The ‘Green Pfandbrief’ – a German specialty goes green

Germany’s real estate banks have also helped to broaden the range of green finance products by launching the green alternative to an old investors-favourite, the ‘Pfandbrief’. The Green Pfandbrief uses mortgages secured by commercial real estate that feature either a green building certificate or an energy label verifying a high degree of efficiency as eligible assets. Berlin Hyp launched the first Green Pfandbrief in 2015, issuing its latest, fifth Green Pfandbrief in July 2020, with real estate bank DZ Hyp and Unicredit launching equally heavily oversubscribed Green Pfandbriefe in the same period[31].

Berlin Hyp also announced in April 2020 that it will expand its Green Bond issuance to include Private Placements, executing a €25 million ($29.5 million) three-year medium-term note (MTN) that it subsequently tapped for €10 million ($11.8 million)[32] – and sending a signal that German financial institutions are quickly warming-up to the broad greening of their sector and ready to develop attractive opportunities for the fast rising number of green investors.

First ‘Green Bund’ innovates with twin bond

When German Finance Agency issued its first ever green bond, a €6.5 billion ‘Bund’ and with a 10-year maturity, the market not only celebrated a new and important sovereign issuer joining efforts to advance the sustainable debt market but also welcomed the innovative ‘twin bond’ approach that the German Finance Agency introduced.

The twin bond concept means that German Federal Government’s green securities will always be issued with the same characteristics as an existing, conventional Federal security, effectively creating twin bonds that are identical in maturity and coupon but will differ in issuance volume - with conventional issues being placed at significantly larger volumes than its green twin[33].  With this innovative structure, the finance agency is responding to investor demand for green bonds with a high liquidity in the secondary market, with the aim to broaden the investor base for future green ‘Bunds’.

After the success of its green debut – which saw an order book of €33 billion ($38.9 billion)[34] – followed by a five-year Green Federal note in November 2020 for a total volume of €5 billion ($5.8 billion)[35], the German Finance Agency also became the sovereign issuer with the longest-dated green bond in the euro capital market with its 30-year, €6 billion ($7 billion) green ‘Bund’ in May this year[36].


[1] Deutsche Sustainable Finance-Strategie (PDF)

[2] Clean Energy Wire: Too big to just stand by - Germany's financial sector faces climate challenge

[3], [8] Sustainable Finance-Beirat

[4] World Economic Forum: Germany unveils details of new sustainable finance plan

[5] Clean Energy Wire: Germany aims to become global leader in sustainable finance with new strategy

[6] assetnews.com/markets/germany-adopts-first-sustainable-finance-strategy

[7] Deutsche Finanzagentur - Green Federal Securities (deutsche-finanzagentur.de)

[9] GTAI: Financial Services

[10] The German banking system: Characteristics and challenges (PDF)

[11], [16], [17] Clean Energy Wire: Green and sustainable finance in Germany

[12] Renewable Energy Agency: Energy Cooperatives on the upswing and downswing

[13] Pressearchiv - Agentur für Erneuerbare Energien

[14] Umfrage bei Banken und Sparkassen:Geldanlagen mit ethischen, sozialen und ökologischen Anlagekriterien (PDF)

[15] Green and Sustainable Finance Cluster Germany: Mission

[18], [21] Green Bonds Global State of the Market 2019 (PDF) (PDF)

[19] Berlin Hyp AG: Berlin Hyp re-opens Covered Bond market issuing its second Green Pfandbrief in 2020

[20] Climate Bonds Initiative: Climate Bonds launches Germany Green Finance Report firms Germany's position in global top 5

[22], [23] Climate Bonds Initiative: Record $269.5bn green issuance for 2020: Late surge sees pandemic year pip 2019 total by $3bn

[24], [26] Reuters: Germany raises 6.5 billion euros from first-ever green bond

[25] Climate Bonds Initiative: Poland wins race to issue first green sovereign bond. A new era for Polish climate policy?

[27] Climate Bonds Initiative: Poland wins raceClimate Bonds Releases Green Bond Pricing Report for H2 2020

[28] Utility E.ON joins ranks of Germany's corporate green bond issuers | Clean Energy Wire

[29], [30] Initiative CLimate Bonds: Green finance state of the market – 2019 update (PDF)

[31] REFIRE: Berlin Hyp’s €500m Green Bond heralds return of Pfandbrief market

[32] Green, Social and Sustainability Bonds: Berlin Hyp open to green private placements as it hits 20 target early

[33] Deutsche Finanzagentur: Green Federal Securities

[34] ESG Clarity: Germany proves 'greenium' theory with green bond demand

[35] Deutsche Bundesbank : Auction result of the new five-year Green Federal notes (“Bobls”) of 2020 Increase of the conventional 0% five-year Federal notes series 182 of 2020 (marketscreener.com)

[36] IPE: Germany issues €6bn of first 30-year green bond

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