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5 May 2021

Climate action

Setting the course for the financial sector: climate action and sustainability as core themes

The German government adopts groundbreaking sustainable finance strategy

Today the federal cabinet adopted the first German Sustainable Finance Strategy. The goal of the strategy is to mobilise investments that are urgently needed for climate action and sustainability while also addressing the climate risks that are increasingly relevant to the financial system. Germany’s Sustainable Finance Strategy is setting a new course in the financial system based on the core themes of climate action and sustainability. The federal government is thereby developing Germany into a leading sustainable finance location. The ground-breaking set of measures includes redirecting federal investments into sustainable forms of investment, sustainability labelling for consumers (sustainability “traffic light” labels) and new sustainability reporting obligations for companies.

“Today we adopted a decision that will have a big impact. Our Sustainable Finance Strategy sets a decisive course for the financial sector based on the core themes of climate action and sustainability. And that is important, because financial markets can steer trillions of euros towards climate action and sustainability. Sustainable investing means investing money with a view to the future and thereby supporting structural change. This is a win-win situation. We are ensuring the protection of our environment, while the ever-growing need for investment will enable investors to profit from these new developments. That’s why financial markets are an important partner in the transformation of our economy. With sustainable financing we will, together, achieve the necessary social and environmental changes far more swiftly. And we are seizing these opportunities in order to channel investments into sustainable projects.” German Finance Minister Olaf Scholz

“Focusing on climate action and sustainability is the right strategy, also from an economic perspective. The Sustainable Finance Strategy will help mobilise investments urgently needed for climate action and environmental protection. This also makes the strategy an important lever for modernising our economy. Many investors have long recognised that sustainable, forward-looking technologies offer them the best business opportunities in the long term. The financial markets need clarity regarding which investments will still be worthwhile in the future – and which ones will become too risky because they are financing obsolete business models. For this approach to work, we need to clearly define what is sustainable and what isn’t. We are currently negotiating this at the EU level. For the German government, one thing is clear: nuclear power cannot be considered sustainable. Anyone who says otherwise threatens to undermine the credibility of a sustainable financial market policy. Nuclear power is no longer profitable, it isn’t clean and poses unavoidable, major residual risks that can no longer be imposed on the general public.” German Environment Minister Svenja Schulze

The Sustainable Finance Strategy comprises a comprehensive package of a total of 26 measures. The following ground-breaking steps are designed, among other things, to mobilise sustainable investments and hence to protect our natural resources, mitigate climate risks and strengthen financial market stability:

Shifting federal investments towards sustainable investments

With the Sustainable Finance Strategy, the German government is underscoring that it wishes to act as a role model in the area of sustainable finance: the federation’s various civil-service pension funds will gradually shift their investments to sustainable indices. To mitigate the climate risks resulting from greenhouse gas emissions, the carbon footprint of equity portfolios needs to be continuously reduced. This applies to an investment volume of currently around €9bn.

The German government will also contribute to further developing the market for sustainable financial instruments with its green bonds. In future, the aim is to issue green bonds in further maturities in order to establish a green bond yield curve that will become a benchmark in the eurozone’s green capital market. In this way, the German government will increase price transparency and strengthen the development of green financial markets.

Milestone for transparency on sustainability in companies and financial instruments

Greater transparency is another important aspect of the Sustainable Finance Strategy. Transparency is key to the success of sustainable finance with investors. Hence, the German government wants to ensure that reliable and comparable information is available that shows how sustainability risks and opportunities affect companies’ business models and what kind of impact companies’ activities have on the environment and human rights.

Sustainability risks resulting from climate change, the transformation into a carbon-neutral economy, the loss of natural capital, human rights violations and pandemics also harbour financial risks for the real economy and, directly or indirectly, for the financial sector. Recognising these risks and taking them into account will make the financial system more stable. In this regard, the Sustainable Finance Strategy follows the environmental, social and corporate governance (ESG) approach, focusing on transparency, awareness and the systematic development of new methods and instruments.

Sustainability “traffic light” labels to provide more clarity for investors

In future, there will be a sustainability traffic-light system for private investors. Surveys show that the majority of investors want to invest their money with environmental and social criteria in mind. The traffic-light system will make this easier. Such a system could be based on the audited sustainability reports and the EU Disclosure Regulation and show at first glance whether a company takes environmental protection and human rights seriously. A swift EU-wide solution would be the best option in this regard. However, if this does not succeed, the German government will develop its own proposal for a national sustainability traffic-light system.

Comprehensive sustainability reports to become mandatory

With its Sustainable Finance Strategy, the German government has also agreed on a list of requirements for so-called “non-financial” corporate reporting. The German government will be making this a part of the upcoming negotiations for an ambitious new CSR Directive in the EU. The list requires all publicly traded companies and major corporations with limited liability to present sustainability reports. These sustainability reports will also have to fulfil certain minimum requirements. For example, companies will have to make their climate risks transparent and reports will have to be certified by auditors to prevent greenwashing.

German government enhances sustainability in risk management and supervision

The German government will be commissioning a scenario analysis of physical climate risks in the real economy and financial sector in Germany. This will improve methodologies and data; it is also an exercise that will allow individual actors to identify their own risks and incorporate them into their risk management systems. The goal is to enable companies to better recognise and address risks.

The German Finance Ministry will be drawing up a strategy before the end of 2021 to determine how the Federal Financial Supervisory Authority (BaFin) can be supported organisationally, for example with adequate staffing and technological resources. Furthermore, BaFin is due to present a report by the autumn of 2021 in which it will demonstrate how it can improve cooperation with other government departments such as the German Environment Agency and the Federal Office of Economics and Export Control, and thus better benefit from their expertise on sustainability.

KfW bank to become a global leader in financing the sustainability transformation

KfW operates globally and is already one of the biggest promotional banks in the world today. In its banking operations, KfW funds address sweeping mega-trends such as climate change and environmental protection, globalisation and social transformation.

The German government will continue to support KfW in the implementation of its ambitious sustainable finance agenda. KfW has set itself the goal of measuring what impact its funds have and ensuring that they are in line with the Paris Agreement. Thus, KfW will remain a strong partner for the real economy when it comes to financing the social and environmental transformation.

German government advances sustainable finance at the EU level

If these instruments are to be successful, it is essential that sustainability be properly defined. Which activities can be deemed sustainable is currently being negotiated at the European level with the drafting of the “EU Taxonomy”. In its Sustainable Finance Strategy, the German government makes clear its position that nuclear energy cannot be considered sustainable. Nuclear energy generates waste that affects 300,000 generations. It is low-carbon only during regular operation, but inevitably harbours residual risks, as nuclear accidents have the potential to render vast swathes of land uninhabitable. Furthermore, classifying nuclear energy as “sustainable” in the EU would undermine public acceptance of sustainable financial products.

All these measures mean that more capital will flow into the investments that Europe needs for its social and environmental shift towards climate neutrality. The European Commission estimates that annual investments of approximately €350bn will be needed.

A key source in drawing up Germany’s Sustainable Finance Strategy was the final report published by the Sustainable Finance Committee on 25 February 2021 and which was entitled “Shifting the Trillions. A sustainable financial system for the great transformation”.