German financial institutions inadequately prepared for New Green Deal
“Sustainability in financing – that’s not a differentiator for us,” the CEO of a German bank said the other day. Of course, his institution was implementing market, political and supervisory requirements, but that was what everyone did, he added.
Unfortunately, that is not how it is: It is true that everybody is currently talking about the great transformation of the economy, about the New Green Deal, about huge investment volumes. This gives the impression that we have been on the right track for a long time. A closer look reveals that there are some pioneers in the German banking landscape, but the majority of institutions are not well prepared for the “next big thing”.
This was also the tenor of our recent zeb.Great Women network meeting on the topic “Sustainability as an obligation and an opportunity”.
What is the status quo? No matter how hard producers of brown coal try, their business remains a “brown” business. This relates to around five percent of our economy. We are already recording nearly the same amount of green companies, which include, for instance, producers of electricity from wind power. However, an overwhelming 90 percent of the German economy is facing a more or less major transition towards more sustainable production, which translates as climate-neutral, resource-conserving, socially responsible and based on good corporate governance (ESG).
Nine out of ten companies need to change
Less than one percent are really shaping the future
However, for capital flows to be properly managed, you need to have a powerful financial services sector, which is in a position to distinguish green from brown investments, allocate funds correctly and manage the risks. This requires sustainably designed products, data expertise, ratings – ultimately know-how and processes to seize the opportunities for society and the economy, especially for financial services providers. “Institutions must invest in a zero-emissions economy,” energy economist Prof. Dr. Claudia Kemfert of the German Institute for Economic Research (DIW Berlin) strongly urged during the latest zeb.great women event. “They should only allocate funds to promising business models.”
However, the industry is far from living up to this expectation: according to our findings, less than one percent of credit institutions are truly pioneering or shaping the future in terms of ESG; another one percent or so have a business model that is holistically oriented towards sustainability. These are the top two levels of our five-point scale.
Almost all institutions do not make it there yet: around 40 percent of banks, including savings banks, offer sustainable products and thus make up level 3 of the scale. About 50 percent have only taken individual measures so far. At the bottom level, the remaining 10 percent or so assume only a minimum of corporate social responsibility. This shows that the level of maturity for integrating ESG into the core business still has a lot of room for improvement, to put it mildly.
A lot of work awaits the banks. The Disclosure Regulation has been in force since March. Since then, financial services companies have been required to prove how sustainable their offers are. And this is just the regulatory overture for many more requirements to come from supervisory authorities. Market participants will also want more information in the future in order to be able to invest sustainably. Our latest zeb Sustainability Study shows that retail customers in Germany already attach immense importance to this aspect.
Even so, ESG also opens up opportunities. According to conservative estimates, we expect an additional annual income volume of EUR 28 billion in Europe. Significant market potential can be tapped here, and this may represent an option for alleviating the existing pressure on earnings. Each bank will have to clearly define its own strategic positioning and ambition – the more holistic, the more ambitious!
ESG is an effort ... but it is also an opportunity
It takes courage and determination
Such projects cannot be implemented bottom-up. They will need to be driven forward at board level. After all: the eye of the master fattens his cattle – to quote a favorite saying of former Siemens CEO von Pierer. And it will take courage and determination to whip banks into shape for sustainability. This process will require a clearly defined target system, ongoing control and clear-cut governance.
Europe will be climate-neutral in 2050. It has to. In the WorldRiskReport 2021, six of the ten most important risks of our time were attributed to sustainability risks. Dealing with these risks requires more than just a partial rethink in individual sectors of the economy. “A successful economy needs a financial system that is sustainable and hence fit for the future,” the Sustainable Finance Advisory Board states. “To ensure our competitiveness, we need to finance the transformation of the economy: positioning us well in tomorrow’s global market while being compatible with the 1.5°C target of the Paris Agreement and the United Nations’ 17 Sustainable Development Goals.”