Introduction

The topic of sustainable finance has emerged from the shadows and is now firmly in the spotlight. This is a great success, and one that has been achieved thanks to work carried out at the G20 level (Green/Sustainable Finance Study Group) and thanks to the European Commission, as well as to BaFin and the Deutsche Bundesbank. Discussions surrounding this topic have intensified at the European and national level, fuelled not least by the controversial discussion at the global/G20 level. The debate is becoming ever more animated and also more concrete: the publication of the European Commission's ambitious and important action plan, “Financing Sustainable Growth”¹ (March 2018), shows that progress is already being made since it puts the topic and the debate on the agenda of financial market participants and financial market policy. The first tangible progress in terms of implementation has already been made. The BMF has contributed considerably to this. We support the goal of making the EU and Germany as a financial centre a “Global Sustainable Finance Champion”. To this end, the BMF works in close collaboration with other ministries, in particular the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (Bundesministerium für Umwelt, Naturschutz und nukleare Sicherheit – BMU) and the Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie – BMWi), as well as with BaFin and the Deutsche Bundesbank, and is in dialogue with representatives of the financial industry, the real economy, civil society and academia.

What is sustainable finance?

There are numerous views on the meaning of sustainable finance. As regards “sustainable”: sustainable finance relates to the achievement of our sustainability goals. Sustainability itself has many dimensions. For us, the United Nations’ 17 Sustainable Development Goals (SDGs)² in addition to achieving the Paris Climate Agreement³ are of key importance, not least because the Federal Government has committed itself to achieving these goals. As regards “finance”: this relates to financial market participants identifying, managing and making use of the risks and opportunities that arise (for example as a result of climate change and the transition to a more sustainable economy).

A broad understanding of sustainable finance could also extend to fiscal policy, in addition to financial market policy and regulation (such as CO₂ prices, tax privileges and subsidies). However, in our understanding sustainable finance means that sustainability-related issues are
taken into account in the decisions made by financial market participants.

Figure 1: Sustainable finance in context

The following implications for financial market policy apply:

Risks for financial market participants (as well as their customers and the financial system) must be considered appropriately – which of course also applies to physical climate risks and risks that may arise from the transformation to more sustainable development.⁴ The primary aim is to increase risk awareness and to improve methods.

It is our view that the financial industry can make a considerable contribution to sustainable development. A financial system can collect as well as evaluate information and, above all, can fund investments. Integrating sustainability-related issues into financial market decisions can ensure that market participants with the potential to thrive in a more environmentally-friendly and climate-friendly economy are identified and receive financing. The financial industry can thus finance the transition to a more sustainable economy.

Transparency of financial market participants towards institutional and private investors is also important with regards to the efficiency of the financial system. Financial market participants should explain how they take sustainability-related financial risks and opportunities into account. For this purpose, the financial industry must be able to explain their understanding of sustainability to their clients. The corresponding need and the demand for sustainable financial products will continue to rise among both institutional and private investors. The financial industry can actively follow this positive development and thus promote sustainable investments whilst at the same time making use of its own opportunities in the market.

Furthermore, we encourage financial market participants to adequately consider the consequences of their decisions both for people and for the environment.

Sustainable finance at the global level

At the global level, sustainable finance can play a role in achieving the 17 SDGs and successfully tackling challenges such as those posed by climate change. As part of the Paris Climate Agreement, it was explicitly agreed upon that finance flows should be made consistent with a pathway towards low greenhouse gas emissions and climate-resilient development (see Article 2.1 c).

The Federal Minister of Finance has been involved in the process of establishing the Coalition of Finance Ministers for Climate Action from its beginnings, having joined the coalition on 13 April 2019.⁵ Through this coalition for climate protection, finance ministers aim to promote global climate protection within the framework of the Paris Agreement and to join forces for this purpose based on their respective national competencies and tasks. Apart from issues related in particular to fiscal policy, the coalition will address how private capital and the financial industry can contribute to achieving our climate goals.

Finance ministries and central banks within the G20 have already held concrete discussions regarding green or sustainable finance and have agreed on voluntary policy options.⁶ In 2016, the G20 Green Finance Study Group started its work under the Chinese G20 presidency. Under the German presidency in 2017, the group primarily dealt with risk management by financial market participants and the use of publicly available environmental data. In 2018, the group – which by this point had been renamed the Sustainable Finance Study Group – focussed on opportunities and on financial market development.⁷

The work of the G20 has initiated two positive developments. Firstly, central banks and supervisory authorities around the world have started to review whether and to what extent financial market participants are adequately taking account of their risks. This also includes the German financial supervisors (BaFin and the Deutsche Bundesbank). The Federal Ministry of Finance supports this approach as well as their active membership in the Central Banks and Supervisors Network for Greening the Financial System.⁸ Secondly, there was also a political dimension to the work performed at the G20 level: European representatives united in the face of difficult negotiations and clearly positioned themselves in favour of green and sustainable finance. The European Commission has seized this momentum and, with the support of the member states, has shifted the focus at the European level towards the topic of sustainable finance.

Sustainable finance at the European level

The action plan “Financing Sustainable Growth” and the provisional finalisation of two EU legislative acts already reflect this prioritisation. At the end of February 2019, the European Commission, European Parliament and the Economic and Financial Affairs Council agreed in the trialogue on creating two new low-carbon investment benchmarks. At the beginning of March 2019, provisional agreement was reached regarding new sustainability-related transparency requirements for financial undertakings. With this, it was possible to finalise, on a provisional basis, two of the legislative proposals⁹ published by the European Commission in May 2018. These agreements were facilitated since France and Germany advocated for a timely agreement in the council (i.e. among member states), which is necessary before trilogue negotiations can begin. With this, France and Germany were meeting their joint obligation to rapidly push forward important elements in the area of sustainable finance - in line with the Meseberg Declaration of 19 June 2018.¹⁰

The new sustainability-related transparency requirements in particular can make a considerable contribution to increasing sustainable financing by raising investors’ awareness of environmental, social and governance factors.

For the member states, the primary focus was to increase transparency regarding the way in which financial risks are taken into consideration in investment decisions. The European Parliament was of the view that on top of that, transparency with regard to the consideration of the impacts on sustainability factors is important. This relates to impacts on humans and the environment, regardless of whether there is an associated risk for the financial value of an investment. The compromise reached takes account of proportionality to the extent that, with the exception of major players, financial undertakings can also disclose that they do not take account of these additional impacts (report or explain principle).

Additional sustainability information must be made transparent in the case of financial products with a sustainable investment strategy.

Since the text of the regulation still needs to be edited, translated and subsequently ratified by the Parliament and the Council, we expect it to come into force no earlier than the autumn of 2019.

The proposal of the European Commission on provisions for investment services enterprises, insurance intermediaries and insurance undertakings regarding the way in which sustainability factors are taken into consideration as part of customer advice is also based on the proposal for a regulation on sustainability-related transparency requirements. The European Commission has already published and held consultations on the corresponding draft amendments to the existing delegated legislative acts, however owing to the ongoing work on sustainability-related transparency requirements, these amendments have not yet been adopted.

Furthermore, it is important that a taxonomy be developed that would serve as a common language to help financial market participants understand the various dimensions of sustainability and to deal with conflicting aims. This, however, is a challenging task, not least because a taxonomy would not only affect the financial industry but also, indirectly, the real economy. Together with many member states, we are of the opinion that we must find suitable and practicable solutions to this important and complex task. Therefore, more in-depth discussion is required and to that end we are engaged in a close and constructive dialogue with our European partners.

We will also continue to support the appropriate, effective and practical implementation of the European Commission's action plan “Financing Sustainable Growth”. An important next step is the establishment of an EU green bond standard. We take a critical approach towards the discussion surrounding the so-called green supporting factor. Reducing capital requirements simply because investments or loans have been defined as sustainable, although they do not pose a lower risk from a supervisory point of view, would be contrary to the goal of financial market stability. The Federal Ministry of Finance rejects the notion of reducing requirements on the basis of a mere label. This is not being supported by a majority of member states as well. Rather, we support the supervisory approach adopted by BaFin and the Deutsche Bundesbank of reviewing whether financial market participants also adequately take account of environmental and climate risks for financial market participants (and their customers).

Sustainable finance at the national level

Sustainable finance, i.e. the integration of sustainability-related aspects into decisions by financial market participants, is nothing new in Germany. KfW Banking Group is one of the largest environmental banks worldwide and through its on-lending to borrowers via local banks and commercial banks, it supports the development of sustainable finance at the local and commercial banks. Also thanks to the activities of the KfW, the green bond market developed significantly. Many other financial market participants in Germany have committed themselves to engaging with sustainability-related aspects through, for example, focussing on the common good or supporting their members (in the case of cooperative financial institutions). In the global financial market, many German financial market participants are considered to be innovative or among the leaders in their field.

There are numerous sustainable finance initiatives, such as the Green and Sustainable Finance Cluster, the Forum Nachhaltige Geldanlage (forum for sustainable investment) and the Hub for Sustainable Finance.

The Federal Ministry of Finance is heavily involved at the global and European level and, together with the BMU and the BMWi, has also introduced the topic of sustainable finance to the State Secretaries' Committee for Sustainable Development (Staatssekretärsausschuss für Nachhaltige Entwicklung – StA NHK), which among other things oversees the implementation of Germany’s sustainability strategy at the political level. The StA NHK is chaired by the Head of the Federal Chancellery; all ministries are represented in the Committee.¹¹

The StA NHK has agreed upon and published a general understanding of the term sustainable finance in addition to a clear position on the topic on behalf of the Federal Government.¹² Furthermore, the StA NHK has asked the BMF and the BMU, in close collaboration with the BMWi and all other ministries, to implement the following measures in order to make Germany a leading sustainable finance centre:

1. Develop a Sustainable Finance Strategy including a communication strategy for the Federal Government
2. Set up a Sustainable Finance Advisory Committee
3. Continue the exchange of experience as regards the integration of sustainability-related issues in federal investments
4. Review whether it is economically feasible to issue green or sustainable bunds (government bonds)

The aim is to implement these next steps as soon as possible.

Outlook

In the years ahead, the topic of sustainable finance will continue to be a key focus at the global, European and national level. At the global level, this issue will gain momentum thanks to the Coalition of Finance Ministers for Climate Action. We are confident that the topic of sustainable finance will also be a key focus of the next European Commission. We welcome this and will support the Commission, including as part of Germany’s presidency of the Council of the European Union in 2020. Our ongoing efforts at the national level will support the financial industry in better identifying and managing the risks that are emerging from environmental pollution and climate change. At the same time, awareness of the opportunities associated with sustainable finance will increase. This will create a more stable and more efficient financial system, and will contribute to the achievement of our climate and sustainability goals.

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