Green bonds, Finance Ministries and the EU Action Plan: Is Germany finally moving on sustainable finance?

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In a recent survey on the EU countries perceived to be the most important, there was one overwhelming conclusion: “Whichever way you cut it,” said the authors of the YouGov study, which gathered the views of thousands of people from across the globe, “Germany comes out on top”.
It’s a long-standing reputation, and one with good foundations: it’s the largest economy in Europe, the fourth largest globally, the fifth largest exporter of goods and services and – crucially, in terms of investment – the largest capital exporter in the world. It’s a founding member of the European Union, and remains controversially dominant.
All of this means that Germany’s absence from the sustainable finance debate so far has been noticeable, and a challenge for Europe. The country’s government makes no mention of the topic in its coalition treaty; it is missing from the growing list of sovereign green bond issuers, which now includes France, Spain and Belgium; The Bundesbank is part of the Network on Greening the Financial System, but compared to its counterparts in the UK, France and the Netherlands, the central bank has remained outwardly uninspiring. There is an apparent lack of public leadership on sustainability from the country’s institutional investors, (although Allianz committed last year to aligning its portfolio to 2°C). This final aspect is important, and due largely to the structure of the German economy, which has a very fragmented pension system and is dominated by bank lending and retail saving, meaning it hasn’t been a natural fit with the traditionally equities-focused, pension-led ESG movement.
But this could all be about to change. Last month, senior figures from across Germany’s government and financial sector agreed to develop a national sustainable finance strategy, to “expand Germany into a leading sustainable finance location”.
Led by the Ministry of Finance and the Ministry of the Environment, in cooperation with the Ministries of Economic Affairs & Energy and Nature Conservation & Nuclear Safety, attendees included the Head of the German Chancellery and Federal Minister for Special Affairs, Helge Braun; Sabine Mauderer, a board member at the Bundesbank; Deka Investment’s Managing Director and former member of the EU’s HLEG, Michael Schmidt; and CEO of development bank KfW, Gunther Braunig.
“We want financial market actors to do more sustainable finance business in Germany, including issuing green bonds, offering sustainable financial products and developing advanced risk management methods,” Braun tells RI. “So it’s our intention to increase the existing expertise and competences of the German financial sector.”

A consortium of consortiums

To help, the ministries will establish a Sustainable Advisory Council, whose members are yet to be announced, to advise government and share knowledge. It may seem like an odd effort, given that – despite having done relatively little in ESG compared to other European countries – Germany already has its fair share of working groups on the topic.

Firstly, there is the Hub for Sustainable Finance, which is a national-level initiative also driven by the Government – namely the Chancellery-based Council for Sustainable Development. Set up in 2017 with help from the German stock exchange, it’s seen by the market as a political initiative, rather than a market-led one, but it hosts an annual summit on ESG.Then, there is the Green and Sustainable Finance Cluster. Also initiated by Deutsche Borse, and led by the State of Hessen (where Frankfurt sits), it was originally called the Green Finance Cluster Frankfurt of the Ministry of Economic Affairs for Hessen, but last year it merged with another recently-formed initiative, Accelerating Sustainable Finance. The latter’s members – including BNP Paribas, Allianz, SEB, UBS, Triodos, Societe Generale and Union Investment – signed something called the Frankfurt Declaration, described as “a general letter of intent about the creation of sustainable infrastructures in the financial sector”. Last year it launched a report looking at the state of the market in Germany, from a sustainability perspective; and it has worked with WWF on a ‘policy roadmap’ for Government.

“If the Bund turned green, that would be the second biggest signal to the market that one could possibly imagine” – Manuel Adamini, Climate Bonds Initiative

“It’s really picking up pace at the Cluster,” explains Kristina Jeromin, Head of Group Sustainability at Deutsche Borse and Managing Director at the Cluster. “We’ve now set up a working stream on how to implement the recommendations of the TCFD in German financial institutions, and we’re beginning to look at how financial institutions can deal with being Paris compliant.”
Braun insists the new Advisory Council will “not replace existing structures and institutions,” but will “strengthen existing engagement and help to bundle the flow of information towards the federal government”.

A green bund?

In addition to setting up the Advisory Council, the new Government strategy includes a commitment to consider whether issuing green or sustainable bonds is “economically viable”. No firm decision has been made, but the announcement has already caused ripples.
“If the Bund turned green, that would be the second biggest signal to the market that one could possibly imagine, after Treasuries,” says Manuel Adamini, Head of Investor Engagement at the Climate Bonds Initiative.
Beyond long-standing and major issuance from KfW, the German green bond market has been excruciatingly slow to develop (again, this is partly down to the emphasis on bank lending, but green loans haven’t taken off either).
“On one hand, Germany has performed so extraordinarily well on renewables deployment, especially wind and solar, but at the same time so poorly on carbon emissions because of their coal consumption,” highlights Adamini. “That inconsistency is one reason why it’s hard to convince German issuers to launch green bonds – because the national trajectory isn’t clear, and invites cynicism.”
But a boost from a sovereign deal could encourage big companies to rethink issuing, he says. “Germany is a very hierarchical, top-down market, so once that happens, there will be an awful lot of CEOs that take note and consider whether they can be seen as not following suit.”
Notably, the annual general meeting of the Green Bond Principles is being held in Frankfurt this year, for the first time, which Adamini says “points to something, and will be a very positive signal to the market too”.

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h6. Reining in Brussels

While the new agenda from Government might tackle some of the areas where Germany has attracted criticism so far – central bank engagement and potential sovereign issuance, for starters – there is another area where Germany has developed a reputation for being ‘anti-ESG’ in recent years. Insiders say the country’s attitude to the EU’s Action Plan on Sustainable Finance has sparked genuine concerns within the European Commission that Germany will flex its muscles at Council and Parliament to rein in the agenda. In March, this played out through the Parliamentary vote on the green taxonomy, when German MEP Markus Ferber (part of the European People’s Party) led a major push back against planned amendments to the proposal, which would have made it more ambitious.
One observer, closely plugged in to the EU Action Plan and sustainable finance, said there is a “strong centre-right move in the Bundestag to block any more green policies”, adding that they were “working on a slogan of save the climate AND the economy – i.e. delay any green action until we are sure there is no negative impact on the economy”.
On top of the political opposition, the German pension fund association, aba, has been one of the most vocal critics of the EU’s Action Plan. Last year, in response to the Commission’s legislative proposal on disclosures, it issued a statement saying it “welcome[d] the EU’s support for institutional investors to include ESG factors and risks in their investment decisions and risk management, but we reject a blanket requirement to do so”.
But others say the hostility is more dynamic than its reputation suggests. “There is this cliché of the German mentality which in this case maybe proves to be true: German perfectionism,” concedes Dustin Neuneyer, Head of Germany & Austria for the UN-backed Principles for Responsible Investment. “Germans love order, and abide by rules – which becomes tricky when not every detail has been sorted yet, and they’re asked to agree general and ambitious and distant targets. The EU Action Plan is clear on those targets and refers to others that are already set, like the Paris Agreement, but many details on how to get there just have to be developed ‘on the fly’.”
Jeromin agrees, saying that the German government is “taking its time to understand the topic”. One concern, she explains, is the EU’s focus on green. “One big difference between Germany and some of the other financial centres – and Brussels – when it comes to sustainability, is that we take a broader view. In Germany, there’s been an education process among politicians and market participants so they realise that it’s not just climate that’s important for future-proofing financial markets, but also social and governance issues”. This is perhaps illustrated most clearly by the fact the Government’s plans around bond issuance includes sustainability bonds, not just green notes – a first for a European government.
The Chancellory’s Braun claims Germany has backed the European sustainable finance agenda “from the very beginning”. “Germany supports the appropriate, effective and feasible implementation of the Action Plan,” he tells RI. “We’re very glad that the political agreements on the benchmark and disclosure proposals were reached. We also support the development of an EU taxonomy, but we share the view of other Member States that we should encourage a broader discussion on a European taxonomy framework.”

Asset owners and banks

Despite the fragmented pension fund landscape in Germany (and the fact there isn’t a dedicated occupational pension supervisor to implement standardised ESG rules across the sector, as in many countries), Germany still has some key pools of capital that could act as first movers. In 2017, the Government set up a Nuclear Waste Disposal Fund, capitalised by payments from German nuclear power plant operators. Standing at nearly €25bn, Braun says “ESG criteria have already been incorporated into the investment strategy” of the fund, but provided no further details.For other federal-level public funds, he says, “concepts are being developed around how to consider sustainability aspects”. “The methods of integrating sustainability aspects depend significantly on the size, management and purpose of the fund, so an exchange of experience can support decision-makers – and this is intended to be intensified”.

“Germany needs to be very careful that it gives due attention to the attractiveness of its market from a governance perspective” – Mirza Baig, Aviva Investors

But, due to the dominance of lending activities in Germany, most eyes are on the banks.
“The banks are leading the conversation here,” says Jeromin. “They may not be the most progressive players in the universe at the moment, but they do understand the importance of these risks, and they can also see the opportunities.” Banks make up the majority of the Hub and the Cluster, and are working together with 2 Degrees Investing Initiative, NGOs, academics and Deutsche Borse on a Government-funded ‘robo-advisor’ which will help them quiz clients on their environmental and social values when offering them financial products (something the EU is currently looking to introduce through amendments to MiFID II). A blueprint of the survey is due next month.

Governance Code

Another key development in 2019 will be the long-awaited update to Germany’s Corporate Governance Code. Writing in RI recently, Chris Rushton, a Lead Analyst at Glass Lewis, said the updates – which will be finalised this summer – should offer “much stronger” guidance on board independence and governance, which “would more closely align the German Code with investor expectations and address a number of points for which the code has received some criticism in recent years”.
However, not everyone is as positive. Aviva Investors’ Global Head of Governance, Mirza Baig, tells RI the code is “moving in the right direction, but at a glacial pace”.
“Germany has always considered itself to be different, and have a unique governance model, and has therefore discounted evolving best practice globally on governance,” he observes, referring partly to the country’s ‘co-determination’-based, two-tier board structure, which gives heavy weight to employee representatives. “The percentage of independent directors that minority shareholders are able to appoint is limited, and that’s always been a concern.” He points to the VW scandal as an example of where the model “really blew up”. “On a 20-person board there was one independent director, which is beyond tokenistic, and is effectively of no value to shareholders at all.” In the new code, Baig wants to see “a bolder position on the percentage of independent directors”, but says it currently looks set to remain relatively vague.
“Fundamentally, to deliver on these kind of sustainable finance objectives, you’re effectively competing with most European centres to harness capital,” he says. “And a key component of attracting capital is protection of shareholder rights. Germany needs to be very careful that it gives due attention to the attractiveness of its market from a governance perspective to make sure they can deliver on their broader sustainable finance agenda.”

This is the sixth in our latest ESG Country Snapshot series. Other countries so far include Japan, Norway, Australia, Mexico and Ireland