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).
