Germany adopts first sustainable finance strategy

On the 05/06/21 at 6:40AM


Adrien Paredes-Vanheule

As part of the strategy, German federal pension funds will plug €9bn assets into EU climate transition benchmarks and the government is scheduling the issuance of green govies with a longer maturity.
German Bundestag in Berlin

Olaf Scholz, the German federal minister of finance, speaks of “a far-reaching decision” for the local financial sector. Germany, on Wednesday, adopted its first sustainable finance strategy, which aims to mobilise investments for climate protection and sustainability. The national strategy is also due to address climate risks within the German financial system.

Germany seeks to reach carbon neutrality by 2045, with the objective of trimming by 65% its greenhouse gas emissions (vs.1990) by 2030 and 88% by 2040. These are already 40% down compared to the 1990 levels. Hence, to ramp up efforts, the 26-measure package implies shifting federal investments to sustainable forms of investment, sustainability labels for consumers (sustainability traffic lights) and new sustainability reporting requirements for companies.

A €9bn shift in sustainability indices

The government said the various federal pension funds will thus gradually reallocate their equity investments into sustainability indices and align on internationally recognised sustainable standards and norms. “The greenhouse gas emissions of the equity portfolios must therefore fall continuously in order to reduce the resulting climate risks. The investment volume is currently around €9bn,” it said. The strategy's document specifies that the equity investments will be gradually divided into two sustainability indices applying the EU climate transition benchmark requirements and aligned with the Paris Agreement objectives. 

The German authorities have chosen S&P Dow Jones Indices to develop an innovative environmental, social and governance (ESG) index which will serve as a performance benchmark for four of the government’s federal special pension funds.

The S&P ESG Eurozone 60 Bund-SV Index will rely on S&P Global’s ESG scores to determine eligibility. Index constituents will be selected and weighted to be collectively compatible with a 1.5°C global warming climate scenario and to meet other climate-focused objectives. Companies involved in certain business activities, including those that are not aligned with the principles of the United Nations’ Global Compact and those that are involved in ESG controversies, will be excluded from the index.

Longer maturity in green govies

The government added that it will play its role in the development of the sustainable financial instruments market through German green bonds. These will be issued with longer maturities, it said, “so that a green federal yield curve can be established and become the benchmark in the green euro capital market.”

Germany has already planned the issuance in May 2021 of a first 30-year green federal bond while a second 10-year green federal bond issuance is scheduled for the second half of 2021.

Green light for retail investment

The German authorities said they want to ensure reliable and comparable information offers that show how sustainability risks and opportunities affect the business models of companies and what effects corporate activities have on environmental and human rights.

Besides, Germany is keen on developing a traffic light system for financial products in order for private investors to better spot sustainable products.

“Such a traffic light system can build on the audited sustainability reports and the EU disclosure regulation and make it clear at first glance whether a company takes environmental protection and human rights seriously. A quick EU- wide solution would be the first choice here. Should this not succeed, the federal government will work out its own proposal for a national sustainability traffic light,” said the German federal government.

Non-financial corporate reporting under watch

The German sustainable finance strategy sees the implementation of requirements on non-financial corporate reporting such as audit certification, integration of climate risks. The authorities said they will bring this into the upcoming negotiations on the EU corporate social responsibility directive (CSRD). 

Another key component of the strategy, the federal government will commission a scenario study on physical climate risks for the real economy and finance in Germany. “The aim is to enable companies to better recognise and deal with risks based on this,” it specified.

Green supervisory strengthened

Germany plans to bolster green supervisory as well. The Federal Ministry of Finance will therefore develop a concept in 2021 “as to how the Federal Financial Supervisory Authority ( BaFin ) will be supported organisationally, e.g. through appropriate human and technological resources.” Moreover, BaFin will release a report by autumn 2021 on enhancing cooperation with other federal institutions, including the Federal Environment Agency (UBA) and the Federal Office for Economics and Export Controls (Bafa).

The German authorities pledged to continue to support Germany’s investment bank Kreditanstalt für Wiederaufbau (KfW) in implementing its sustainable finance agenda.

A clear no to nuclear in EU green taxonomy

Lastly, the German federal government reaffirmed its negative stance towards the inclusion of nuclear in the EU green taxonomy.

“The financial market needs clarity about which investments will still be worthwhile in the future - and which will be too risky because they finance past business models. For this approach to work, the definitions of what is sustainable and what is not must be correct. We are currently negotiating this at European level. For the federal government it is clear: nuclear power cannot be sustainable,” said the German environment minister Svenja Schulze.

She added that anyone claiming the opposite is “jeopardizing the credibility of a sustainable financial market policy.” 

“Nuclear energy is no longer economically viable, it is not clean and it harbors unavoidable, large residual risks that can no longer be dumped on the general public," Schulze said.

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