The sustainable finance strategy put forward by the German government is an important step signalling political will to achieving ambitious climate goals and to transform the economy, but it lets down occupational pension investors.
“With its goals and measures […] the government clearly shows how a sustainable financial market can accelerate the socio-ecological transformation of our economy and contribute to the achievement of sustainability and climate goals,” Karsten Löffler, head of the UNEP collaborating centre for climate and sustainable energy finance at the Frankfurt School of Finance and Management and chair of the sustainable finance committee, told IPE.
The sustainable finance committee – a working group of experts from the finance, real economy, science and civil society industries that advises the government on its sustainable finance strategy – published a report with 31 recommendations, while the government’s strategy outlines five goals and 26 measures to achieve them.
“I am glad that the government’s strategy is finally on the table, many of the measures are based on the recommendations of the committee,” Silke Stremlau, member of the managing board at the occupational pensions provider for the non-profit sector Hannoversche Kassen and member of the sustainable finance committee told IPE.
Some topics, for example social taxonomy, are “new and important”, she added, while other measures remain “too vague”, for example on the qualifications of management and supervisory boards, and also supervision in general relating to sustainable finance.
It is “a sign of progress” the fact that the government is anchoring in its strategy to social standards for sustainable investing through a social taxonomy and human rights due diligence in supply chains, Löffler added.
Private, institutional investors and lenders expect transparency with regards to sustainability effects and risks, he said.
“The government takes this into account by adding corporate reporting [in its sustainable finance strategy],” but now “it should make even more specific proposals in order to design tangible solutions,” he added.
According to the strategy, the government will work towards further developing the EU taxonomy in the short and medium term to draw up a social taxonomy in coordination with a European regulation on sustainable corporate governance.
It has meanwhile tightened its goals by amending the Climate Protection Act after the ruling of the Constitutional Court. It has set the target for climate neutrality by 2045, instead of 2050, and to cut CO2 emissions by 65% by 2030 and by 88% by 2040.
“It is clear that it cannot do this without the support of private investments,” Stremlau said.
Wiebke Merbeth, head of public affairs and sustainability at BayernInvest, expert for the implementation of sustainability at company level and member of the sustainable finance committee, told IPE that a sustainable financial market policy will demand a great deal of financial, personnel and structural effort from the asset management industry.
“But in the medium term it is the only feasible way for asset managers to remain stable in the long term and for Germany to assert itself as one of the leading sustainable finance locations worldwide,” she said.
For Löffler, asset managers and asset owners rely on “high-quality, standardised sustainability-related information” from companies for the analysis of investment risks and opportunities.
The government is addressing this issue within its sustainable finance strategy in the form of strengthening non-financial reporting, he noted.
“It has listed a number of changes, such as the expansion of the scope of application [of non-financial reporting] and reporting on the effects of companies’ business activities on sustainability – the keyword here is double materiality,” he said.
A bitter taste on occupational pensions
The government has left a bitter taste for occupational pension investors, with specific recommendations drafted by the sustainable finance committee omitted in the final strategy.
“Unfortunately, the government has not implemented any of our recommendations on IORPs and Pensionskassen in its strategy,” Stremlau said.
The committee had advised to change regulatory requirements for capital investments by Pensionskassen to up allocations in green infrastructure, she added.
It had recommended a review of the funding requirements in the Insurance Supervision Act (VAG) for Pensionsfonds and Pensionskassen, or including specific asset classes, for example infrastructure, in the Investment Ordinance.
“Unfortunately, the government has not implemented any of our recommendations on IORPs and Pensionskassen in its strategy”
Silke Stremlau, member of the sustainable finance committee
“More courage and clarity, especially from the ministry of finance, would probably have been necessary here,” Stremlau said, adding that “there is nothing in the strategy about our recommendation on an engagement platform,” a topic where Germany lags far behind Anglo-Saxon countries or the Netherlands.
The government has likely been forced to prioritise after looking at a vast number of recommendations from the committee on many different subjects.
“Have the issues [proposed by the Committee] been taken up [by the government]? Basically yes. Did [the government] give further thoughts on the subjects? Not yet, but we can use the next legislative period for this,” Merbeth said.
She added: “We are only now achieving the dynamism in the financial and capital markets so urgently needed to link EU taxonomy, national standards, and individual objectives. We are gradually building up data sets in order to quantify sustainability risks and effects; the internalisation of external costs is progressing step by step, which takes time and thinking.”
“Ultimately, overloading helps us just as little as inadequate reporting, inadequate and not properly reviewed key figures and topics,” Merbeth said.
Capital markets can play an important role in financing the transformation to a sustainable economy and it is important to support this process as much as possible, Löffler said.
Merbeth pointed at the stewardship and a common European data platform as the right steps for Germany and Europe to become leading sustainable finance locations globally.
From the point of view of a Pensionskasse, “it would be extremely important not to orient the funding requirements to a specific date”, while the Investment Ordinance should include specific asset classes to let money flow into green infrastructure, Stremlau said.
The financial sector can only finance the transformation to the extent necessary if the political framework conditions are set to support it, especially with regards to the real economy, Löffler said.
“Investors need a sufficient and attractive deal flow and sufficient margins for investing risk capital in addition to sustainability-related data as the basis for investment decisions,” he said.