The Financial Sector as Climate Protector? The Potential of Sustainable Finance

Key aspects of the Roundtable "Mobilizing Investment: Is the Carbon Price Sufficient to Create Climate-­Friendly Capital Markets?" on February 24, 2022

• The carbon price is the guiding instrument of climate policy. It drives the transformation of the real econo­my and is the central prerequisite for climate-neutral investments. Uncertainty about the de­vel­op­ment of the CO₂ price creates investment risks. Volatile carbon prices were also cited by finan­cial in­sti­tu­tions as a risk and barrier to investment. Similarly, companies emphasized that these increased risks make their transformation towards climate neutrality more difficult. Decisive action by the state was re­peat­ed­ly called for, for example by the public sector assuming part of the risks through guarantees or carbon contracts for difference.
   
• Reduced risks lower capital and investment costs in particular. Technologies with high capital intensities would benefit particularly. The adjustment of capital requirements was also discussed as a way of re­duc­ing capital costs. However, this should be done with caution: Instead of lowering them in general, sustainability assessments through ratings should be introduced. The lower risk of sustainable in­vest­ments would lead to lower capital requirements in a more targeted manner via the ratings.
   
• For energy- and emissions-intensive companies, high capital costs are less crucial than high input costs. Here, rapidly rising energy costs reduce the scope for financing the conversion of their own processes to climate neutrality from their existing business. From the point of view of these companies, the current CO₂ price limits the financial resources for the transformation and endangers their competitiveness during their transformation.

Key aspects of the Roundtable "Taking a Look Ahead: Forward-Looking Reporting as Trailblazer for a Climate-Neutral Economy?" on March 2, 2022

• The discussion has shown that while more and more sustainability reporting is taking place, it is often still highly inconsistent, unverifiable, and in some cases only qualitative and selective. Studies show a positive effect of mandatory reporting on the emission reduction of companies. The standardization of sustainability reporting that goes hand in hand with mandatory disclosure could be a valuable lever for reaching companies that have so far been performing relatively poorly in this area.
   
• More and more companies from the financial and real economy are committing to the goal of climate neutrality, but many still lack a strategy and a concrete idea of what risks, opportunities and investments this entails. This partly stems from the fact that there has been a lack of suitable scenarios for use in a company-specific context to date, and politics has thus far failed to provide the necessary certainty about future regulatory conditions. The available scenarios, for example by the Network for Greening the Financial System (NGFS), do not sufficiently differentiate between regional and sectoral aspects. An alliance of governmental and nongovernmental actors is needed to support the business community in designing company-specific transition plans. Therefore, it is important to improve forward-looking indicators of sustainability reporting. Following this, there is a need to verify transition plans during the implementation phase.
   
• Overall, a forward-looking approach to sustainability reporting has the potential to reach a much larger portion of the business community with sustainable financing tools, including those aligned with en­vi­ron­men­tal criteria. This will particularly benefit companies in sectors facing the greatest trans­for­ma­tion tasks, such as industrial heavy manufacturing.

Key insights from the Roudntable "Sustainability in the Private Portfolio: Is Transparency the Key to more Sustainable Investment Decisions?" on February 23, 2022

• Investors are increasingly interested in sustainable investing, but often have little or no knowledge about sustainable investments. However, transparency, while desired, is not the biggest barrier to sustainable investing, but rather its complexity. The time required to find adequate sustainable investment products is perceived as too high. In principle, current political approaches (e.g. within the framework of the Markets in Financial Instruments Directive (MiFID) II, the Disclosure Regulation, the EU taxonomy, or the introduction of state sustainability labels) are suitable for overcoming these hurdles.
   
• From the point of view of the consulting practice, the question of sustainability preferences of investors in investment advice on sustainable investments, as stipulated by MiFID II, still has many weak points: Its implementation would have to be coherent in terms of both the timing and the content of the measures. As the discussion on the EU taxonomy makes clear, there is no uniform understanding of sustainability, not even on the part of investors. The resulting increase in complexity in the already time-consuming consulting process could lead to a fundamental reluctance to recommend sustainable products. Moreover, neither financial advisors nor software systems are currently in a position to im­ple­ment the planned measures.
   
• Minimum standards and labels could be of particular help to investors who do not seek investment advice from the bank, as they increase both transparency and the confidence of investors. In fact, investors have strong preferences for labels, while the level of knowledge about their content is rather low. For consumer protection reasons, investors should be warned against blind trust in sustainability labels. There is a risk that investors will link them to other financial aspects, such as the lower risk of labeled products. As discussed in the background paper, investors may also use such labels as heuristics if the investment process is too complex - but disregard other investment objectives and important aspects of investing (such as fees).
   
• In summary, transparency is important, but must be designed in a meaningful way.  Overly detailed and complex information that confuses both the advisory and demand sides is not desirable. First of all, it is more important to increase the knowledge about sustainable investments, the so-called sustainable financial literacy, both among investors and financial advisors.