German investors call on Government to rate all financial products from 1-5 on sustainability

Report from expert group makes 31 recommendations including on disclosure and collaborative engagement

German investors are among those proposing that the German Government develops a sustainability rating for all financial market products.

A long-awaited report from Germany’s Sustainable Finance Committee – a group of private- and public-sector players appointed by the federal government to advise it on boosting ESG investing in the country – includes a recommendation that all financial products are rated from 1-5 based on how well they integrate sustainability standards.

The report says that it is currently “not possible for institutional and private investors to evaluate the positive and negative effects of investments on sustainability goals” because of a “lack of transparency”.

The recommended scale would apply to all financial products sold in Germany which are covered by the EU’s new Sustainable Finance Disclosures Regulation. The lowest rating (1) would indicate “increased ESG risk due to a lack of information”, and the highest (5) would be based on “evidence of a sustainability effect”. 

According to the report, similar classifications have only previously been applied to dedicated ‘sustainable’ products, but “can be widened to all financial products with no great effort”.

The Government is advised to advocate for such a rating system to be adopted at EU level. 

The Sustainable Finance Committee was set up in June 2019 in a bid to help Germany catch up with its European counterparts on ESG. The country has been widely regarded as a laggard on sustainable finance in recent years, but has introduced a number of initiatives to mobilise investment and policy on the topic. The government was highly praised for its green bond debut last year, which saw an issuance of €6.5bn. 

Committee members include representatives from Allianz, Deutsche Bank, BNP Paribas, Triodos, Dekabank, Vonovia, Hoechst-Gruppe pension plan and DZ Bank. It also includes key corporates such as BMW and wind energy firm EnBW, as well as academics. 

Its 31 recommendations, laid out in a 132-page report published in German today, are arranged into five categories: 

  1. Reliable policy framework
  2. Future-oriented and integrated reporting
  3. Systematic build-up of expertise
  4. Sustainability-effective financial products
  5. Institutional consolidation

Another key proposal is for the German Government to create a “platform for the promotion of collaborative engagement” focused on mobilising small and medium-sized investors.

The platform would jointly develop investor engagement strategies and look at the possibility of collaborative engagement, it said, pointing to similar efforts by Dutch engagement group Eumedion. The body could cooperate with such peers elsewhere in Europe, and should have “the highest possible level of public transparency” on its engagement actions, the group said. 

Last week, RI reported the creation of a national-level shareholder engagement programme in Canada, which will target the country’s largest emitters.

On corporate reporting, the group urged the German Government to push for an expansion of the EU’s Non-Financial Reporting Directive – the main channel through which companies in the bloc are required to disclose on ESG – to cover all firms with more than 250 employees. Currently, the rules apply to just 6,000 large firms in Europe, limiting the flow of sustainability-related information to investors and other stakeholders.  

It also calls on the Government to support current EU proposals for a public database of raw ESG data, known as the Single Access Point. 

Other recommendations include incorporating sustainable finance literacy into the school curriculum and the establishment of a transformation and impact fund to invest in SMEs.