Germany’s Sustainable Finance Committee, a group of experts set up to advise the government on a sustainable finance strategy, expects its recommendations to lead to “the establishment of a clear framework” to transform the finance system, said Kristina Jeromin, deputy chair of the committee, at a sustainable forum organized by local paper Süddeutsche Zeitung.
The committee will publish its final report on 25 February, Jeromin said without disclosing the content. It delivered its interim report in March last year.
The committee believes sustainable finance to be the financial system’s central pillar, Jeromin said, adding that its mandate is to drive a reform of the real economy towards sustainability. An essential point to build a sustainable economy is transparency, also for financial products or services in the insurance sector.
One of ESG reporting challenges is data delivered by companies which is “strongly fragmented”, she said. The sustainable finance committee calls for “transparency” on this issue.
A sustainable finance strategy at national level has to be anchored to the EU in order to build global standards, Jeromin noted. A “central point” in this sense is the EU Taxonomy, part of the action plan of the European Commission, she said.
The recommendations to be published by the sustainable finance committee should “lead not only to establish sustainable financing structures in Germany, but also [for Germany] to observe obligations at the EU level” to further development sustainability standards, Jeromin explained.
The committee is looking forward in the next months for the review of the so-called “non financial reporting directive”, which requires companies to disclose data on sustainable activities, and also for the publication of the Commission’s strategy as a continuation of the EU action plan, Jeromin added.
Günther Oettinger, representative of the CDU party and member of the supervisory board at Amundi Deutschland, underlined in his keynote speech the urgency of “a public-private partnership.”
The former EU commissioner highlighted society’s expectations from investors and asset managers. Asset managers could “favour projects and investments that are sustainable”, he said adding that this could create “a balance between returns on one side and sustainability on the other.”
Oettinger questioned the role of the European Central Bank, whether it is a central bank “in the classic sense”, or has “authority and responsibility” for green policies, and if sustainability or CO2 emission reductions are ECB’s tasks too.
Picking the right ESG strategy
Nicole Becker, head of the staff unit for board affairs and sustainability at Bayerische Versorgungskammer (BVK), said the fund sources data externally for all asset classes except for real estate. BVK applies ratings for engagement too.
For real estate, instead, it relies on in-house data for example in indirect investments, on property and asset managers. The fund has set-up ratings for fixed income investments that point to risks on the integration of sustainability within its investment process, while for real estate it has set up a benchmark for risks and potential improvements. BVK decides whether to use external ratings based on a specific asset class.
Munich Ergo Asset Manager (MEAG) has developed its own rating system for alternative investments to assess for example infrastructure investments based on ESG criteria, Janina Lichnosky, senior specialist sustainability at MEAG, said.
MEAG, which manages the assets of insurance firms Munich Re and Ergo, conducts in-house research and due diligence on risks for nature and the impact of climate change on assets. For liquid assets, MEAG works with external rating agencies.
Christian Wolf, head of investment controlling at BVV, the pension provider for the German financial sector, said the fund has worked “very intensely” in the past two years on sustainability within asset allocation and risk management. The strategy is oriented towards three main pillars – ecology, economy and social aspects.
Impact investing is an element of the ESG strategy at BVV. The scheme has decided to align its portfolio with the Paris Agreement.
Anja Mikus, CEO of Kenfo, said that a whole portfolio cannot be aligned to “particular impacts”, but this is an aspect to add to it.
For Steffen Hoerter, former global head of ESG at Allianz Global Investors, the challenges in designing an investment strategy based on sustainability also depends on institutional investors’ experience, as some are “new to the issue”, given also the amount of regulation applied by the Commission, he said.
Social impact with private equity
Social impact has become over the years an important element in traditional venture capital (VC) and private equity investments.
The European Investment Fund (EIF), which provides financing for SMEs, launched a social impact fund of funds (fof) in 2013. It is now structuring its second generation and it does not “differentiate in terms of prospective returns between traditional venture capital and private equity, and impact investment,” said Ulrich Grabenwarter, deputy director equity investments at EIF.
EIF’s fof includes social venture funds which are believed to create substantial value, Grabenwarter explained. He added that social venture funds, with a specific focus on social value creation through impact investing, “are invited by traditional VCs to finance funds because they contribute substantially to value creation in business models.”
Asked about future-proof returns for institutional investors, Grabenwarter explained that successful investments are linked to business models that can “monetize additional social value”, and “this is the challenge for the business models we have,” he said.