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22 May 2020

Sus­tain­able fi­nance – what does the fi­nan­cial sys­tem have to do with the Sus­tain­able De­vel­op­ment Goals?

  • The COVID-19 pandemic and climate change highlight how important the United Nations’ 17 Sustainable Development Goals (SDGs) are to economic growth and financial market stability. SDG 3 aims to ensure healthy lives for all, while SDG 13 focuses on climate action.
  • The issues of health and climate action cover different dimensions of sustainability, which can be directly, or at least indirectly, relevant for financial market participants (such as banks, insurance undertakings, funds or private investors).
  • Germany’s Federal Ministry of Finance is therefore seeking to ensure that financial market participants take due account of sustainability-related issues in their decisions (sustainable finance).

What is sustainable finance?

The federal government understands sustainable finance as meaning that financial market participants take sustainability issues into account in their decisions. It is essential that sustainability-related risks be adequately integrated into financial market participants’ risk management, as environmental changes and associated changes in the real economy, for example, can hold major risks for individual financial market participants and for the financial market as a whole. However, sustainable finance also gives rise to new opportunities for the financial sector which should be seized.

In the resolution it adopted in February 2019 1, the State Secretaries’ Committee for Sustainable Development recognises that sustainable finance can help the German government to achieve its objectives in the areas of financial market stability, energy, climate and development, along with other sustainability-related objectives. This is also why the German government has set itself the aim of making Germany a leading sustainable finance centre.

Infographic Sustainable Finance

The German Ministry of Finance supports sustainable finance at the global level and in Europe

The German Finance Ministry already highlighted the importance of sustainable finance during the German G20 presidency (2017), and supported the G20 Green Finance Study Group and the Task Force on Climate-related Financial Disclosures set up by the Financial Stability Board. At that time, green finance was focused on transparency and risk management. The German Finance Ministry is a founding member of the Coalition of Finance Ministers for Climate Action 2 established in April 2019. The aim of the Coalition, which now comprises 52 national finance ministries worldwide, is to drive global climate action within the framework of the Paris Climate Agreement. To this end, an exchange of experience has been agreed, as well as support for joint standards and principles – known as the Helsinki Principles – within the framework of national circumstances and competences. The German Finance Ministry is part of the working group on Principle 5, which seeks to strengthen sustainable finance worldwide.

The German Finance Ministry plays an active role in the field of sustainable finance at the European level, too. In March 2018, the European Commission published its action plan “Financing Sustainable Growth” 3 , with the previous focus being expanded to include support for achievement of the Sustainable Development Goals (particularly the climate goals). At the same time, sustainability became an important issue for financial market regulation. Over the course of just two years, extensive legislative plans to enhance transparency in the financial sector were brought to fruition.

The core of the action plan is the Regulation on the establishment of a framework to facilitate sustainable investment (Taxonomy Regulation). It is intended to create a comprehensive classification system for sustainable economic activities, in order to foster a uniform, EU-wide understanding of the environmental sustainability of economic activities. The EU taxonomy offers financial market investors information on which investments finance environmentally sustainable economic activities. In addition, the Disclosure Regulation 4 and the Benchmark Regulation 5 have boosted transparency and comparability regarding how sustainability-related factors are taken into account in the financial sector. In the negotiations, the German Finance Ministry sought at all times to ensure that the regulatory framework is appropriate, practicable and effective. The same is true regarding the current development by the European Commission of the delegated acts pursuant to these regulations, which serve to flesh out individual legal elements at the technical level.

This subject remains a high priority under the current European Commission. Substantial investments are needed to implement the European Green Deal, which also means opportunities for the financial sector. This is also the focus of the Commission’s renewed Sustainable Finance Strategy, expected in the third quarter of 2020. The Commission’s initial ideas are currently being discussed in the framework of a public consultation. 6 Sustainable finance will therefore also play a major role during Germany’s Presidency of the Council of the European Union. For example, the European Sustainable Finance Summit is due to take place on 28 September 2020 under the auspices of the German Finance Ministry and the German Ministry for the Environment, Nature Conservation and Nuclear Safety.

Sustainable finance at the national level

At its meeting in February 2019, the State Secretaries’ Committee for Sustainable Development tasked the Ministry of Finance and the Ministry for the Environment, Nature Conservation and Nuclear Safety with developing a Sustainable Finance Strategy in the framework of the German Sustainable Development Strategy, in collaboration with the Ministry for Economic Affairs and Energy and in consultation with all federal ministries. As sustainable finance depends on dialogue between various stakeholder groups, the Finance Ministry and the Environment Ministry, in close collaboration with the Ministry for Economic Affairs, established a Sustainable Finance Committee 7 in June 2019, which aims to institutionalise the substantive dialogue. Thirty-eight representatives from the financial sector, the real economy, academia and civil society, as well as associations and authorities, are currently discussing potential recommendations for action which could serve as the basis for a German Sustainable Finance Strategy. To this end, the Committee published an interim report in March 2020 setting out initial substantive ideas, and invited discussion by launching a consultation. 8 Alongside the Committee’s official meetings, informal workshops have also been held on various key issues, such as the integration of sustainability-related issues in the context of federal investments, the issuance of green or sustainable federal securities, technical issues regarding the implementation of the EU taxonomy, or the role of the real economy in sustainable finance.

German Sustainable Development Strategy

The foundation of the German government’s sustainability policy is the 2030 Agenda for Sustainable Development and its 17 global Sustainable Development Goals (SDGs), adopted by the heads of state and government of the 193 Member States of the United Nations (UN) in New York on 25 September 2015. The 17 SDGs are a comprehensive list of relevant and partially complementary sustainability-related issues, such as action to end poverty (SDG 1), ensuring good health (SDG 3), sustainable economic growth and decent work (SDG 8), climate action (SDG 13) and the conservation of biodiversity (SDG 15).

The first national Sustainable Development Strategy was published by the German government back in 2002 to mark the UN’s World Summit on Sustainable Development in Johannesburg, and has since been regularly updated. Sustainable finance has been a priority for Germany’s Finance Ministry since 2018, as part of the implementation of the German Sustainable Development Strategy . A full revision of the Strategy is currently taking place with the involvement of all federal ministries; this is to be completed and published before the end of 2020.

In developing a Sustainable Finance Strategy designed specifically for Germany’s institutional and economic parameters, the German government is not starting from scratch. It is able to build on tried and tested structures as well as on initiatives that have been launched in the past few years. The Finance Ministry expressly supports the involvement of the Federal Financial Supervisory Authority (BaFin) and the Bundesbank to ensure better integration of risks, and the work of KfW Bankengruppe (KfW) to ensure that better use is made of the existing opportunities. In addition, sustainability-related issues are increasingly being taken into consideration in federal investments, and in debt management via green federal securities.

Sustainability as a key principle at KfW Bankengruppe

KfW plays a vital role when it comes to the integration of sustainability-related issues in the financial market. Not only does it finance sustainable investments, it often does so together with principal banks, enabling them to “learn by doing”.

KfW aims to play an active role in shaping the transformation towards a sustainable economic and financial system. Since mid-2018, it has therefore been following an ambitious plan for the development of its future sustainability strategy: the “KfW Roadmap Sustainable Finance”. Regarding climate action, KfW seeks to achieve the German government’s long-term climate goals in the KfW financing portfolio and to support KfW’s clients in their transformation processes.

One of the Roadmap’s first outcomes is a group-wide Sustainable Development Goal (SDG) mapping, which ensures transparency about KfW’s contributions to the SDGs. With this volume-based and largely automated mapping approach, KfW is a global pioneer when it comes to recording and publishing SDG financing targets for its new commitments each year. The SDG mapping for 2019 reveals the following priorities: sustainable cities and communities (SDG 11: €29.0 billion), climate action (SDG 13: €28.2 billion), decent work and economic growth (SDG 8: €28.1 billion) and affordable and clean energy (SDG 7: €26.4 billion).

As a transformative promotional bank, KfW takes a forward-looking approach in supporting market developments. One example of this is KfW’s new “Climate Campaign for the SME Sector”, which was launched on 15 March 2020 to assist small and medium-sized enterprises in investing more in activities that reflect the EU Sustainable Finance Taxonomy. As part of this programme, KfW is offering not only low-interest loans, but also climate grants of up to €100 million annually.

Support for the green bond market by KfW and green federal securities

Green bonds link the proceeds of an issue in the bond market to the use of these proceeds by the issuers. They are an established instrument for increasing transparency and they help investors in the capital market to better integrate sustainability aspects into their decision-making processes. Alongside information about the funding provided for “green projects”, market participants also receive information about the impacts of the expenditure (impact reporting).

Since 2014, KfW Bankengruppe has been supporting the green bond market both as an issuer and as an investor. KfW has successfully issued green bonds worth a total of €25 billion. The Federation – which plays a key role as a “benchmark issuer” for the bond market in the euro area – will also enter the green bond market in the near future. The respective preparations are currently underway and the first issue is planned for the second half of 2020. The Federation expects this issue to provide positive impetus for the development of the green bond market both in Europe and globally. In addition, the Federation is underlining its commitments, for example under the Climate Action Programme 2030, to expand and give greater weight to its expenditure on environment and climate action in the coming years.

Sustainability risks are a growing focus for BaFin and the Bundesbank

Supervisory authorities and central banks treat sustainability risks as financial risks and expect financial market participants to engage with them to a growing extent. Sustainability risks must therefore be integrated into supervised entities’ risk management and the supervisory review processes. BaFin and the Bundesbank are also actively involved, including at the international level, in the further development of the supervisory and regulatory framework for dealing with sustainability risks.

The Bundesbank and BaFin are among the founding members of the Central Banks and Supervisors Network for Greening the Financial System 10 (NGFS). The NGFS is a worldwide network of central banks and supervisory authorities which work together towards a more sustainable financial system; it now consists of 65 members and 12 observers.

In December 2019, BaFin also published a Guidance Notice on Dealing with Sustainability Risks. 11 It implements an NGFS recommendation and provides input for European work on the integration of sustainability risks. This non-binding notice is intended to provide support to entities supervised by BaFin and the Bundesbank to enable them to better assess and manage their sustainability risks. The notice sets out good practice guidelines which should be followed by the supervised entities, with due regard for the principle of proportionality. The guidance notice can thus be seen as a useful addition to the minimum requirements with regard to risk management for credit institutions, insurance undertakings and asset management companies.

In line with its mandate, the Bundesbank is engaging intensively with the shift to greater sustainability in the entire financial system. In particular, it is seeking to ensure greater transparency and better information about climate risks in the capital market. However, the Bundesbank is engaging with the subject of sustainability from an investor’s perspective as well. In its role as an asset manager, the Bundesbank manages portfolios on behalf of public clients, including the civil service pension provisions of the Federation and the Länder (federal states). As part of the portfolio services it offers, the Bundesbank supports its clients in implementing sustainable investment strategies.

Sustainability of federal investments

The German government has continued the dialogue on potential sustainable investment strategies with the aim of giving adequate consideration to risks arising from sustainability-related issues in the context of federally controlled investments. The State Secretaries’ Committee for Sustainable Development emphasises the importance of freedom in the choice of methods when implementing sustainable investment approaches, as federally controlled investments differ significantly in terms of volume, objectives, legal requirements and management.

Among other things, possible options for implementing a sustainability approach for the shares in which four federally controlled special funds invest have been discussed with the Sustainable Finance Committee. As a first step, investments by these special funds in the operators of foreign nuclear power plants have already been ruled out and shares in these companies have been sold. At a later date, the equity component of these four special funds is to be invested in line with a more comprehensive sustainability approach, using an equity index. In future, other special funds could use this sustainability approach as a guide for their own strategy for investing in shares.

Conclusions and outlook

Issues such as the protection of human health, climate change or the transition to a more sustainable economy are relevant to the financial system, directly or indirectly. In recent years, a great deal of progress has already been made in the field of sustainable finance, i.e. the integration of sustainability-related issues into decisions by financial market participants. In the medium term, however, the COVID-19 pandemic and other factors could result in a wider discussion in society about how the economy can be placed on a more sustainable and stable footing. The financial sector will also play a role in this.

Footnotes

1
For more information, please download https://www.bundesfinanzministerium.de/Content/EN/Downloads/2019-03-11-sustainable-finance.pdf
2
For more information, please visit http://www.bundesfinanzministerium.de/mb/20200532
3
For more information, please visit http://www.bundesfinanzministerium.de/mb/20200533
4
Regulation (EU) 2019/2088.
5
Regulation (EU) 2019/2089.
6
For more informaiton, please visit http://www.bundesfinanzministerium.de/mb/20200536
7
For more information, please visit https://sustainable-finance-beirat.de
8
For more information, please visit https://sustainable-finance-beirat.de/en/consultation/
9
For more information, please download the German Sustainable Development Strategy (PDF)
10
For more information, please visit https://www.ngfs.net
11
For more information, please visit https://www.bafin.de/SharedDocs/Downloads/EN/Merkblatt/dl_mb_Nachhaltigkeitsrisiken_en.html