New German government will push EU on climate in credit ratings and minimum standards for ESG ratings

Germany’s new government has said it will push the EU to require credit ratings agencies to consider sustainability risks in their ratings and introduce minimum requirements for ESG ratings providers. 

A coalition agreement published yesterday between the Green Party, Social Democratic Party (SDP) and Free Democrat Party (FDP) will see SDP leader Olaf Scholz take the Chancellorship, with Green co-leader Robert Habeck leading an Economics and Environment ‘super ministry’ and FDP leader Christian Lindner as Finance Minister. 

Sustainable finance receives half a page of commitments in the 178-page document, which also promises to phase out coal and generate 80% of power from renewables by 2030. 

The agreement reiterates the previous government’s commitment to make Germany a “leading centre of sustainable finance” and commits to implement “a credible sustainable finance strategy” in line with recommendations made by the country’s independent sustainable finance committee. A sustainable finance strategy issued before the election was heavily criticised for its lack of ambition, including by members of the sustainable finance committee itself.  

As tensions rise over the inclusion of gas and nuclear in the EU’s green taxonomy, the framework’s absence from the coalition agreement is noticeable. The only EU initiative mentioned is the Corporate Sustainability Reporting Directive (CSRD), which the new government commits to supporting, with the possible integration of social and ecological factors into existing corporate reporting standards. 

Investors and industry groups broadly welcomed the commitments on sustainable finance – the first time ever the topic has appeared in a coalition agreement – but raised concerns over the absence of the Taxonomy and relative lack of detail compared to other areas. 

Silke Stremlau, Vice Chair of the sustainable finance committee and Director at pension fund Hanoversche Kassen, said other topics in the agreement were more detailed, which raised concerns that the importance of sustainable finance for the transition “has not quite reached the highest levels of politics”.  

While it is “a real shame” and “striking” that the taxonomy is absent, Stremlau welcomed the commitments on the sustainable finance strategy and committee. “I read from this that [the coalition] wants to fundamentally rework the sustainable finance strategy, this is an important step in making Germany a leading centre for sustainable finance”, she said.  

“That the committee should continue to work independently and effectively in the future shows the importance the new government attaches to the body”.  

Tommy Piemonte, Head of Sustainability Research at Bank für Kirche und Caritas, said it was “gratifying” to see sustainable finance in the agreement for the first time. “But where there is light, there is usually also shadow”, he continued. “The concrete design and plans remain very vague, and in some places I feel there is a lack of determination in the description of how ‘Germany is to become the leading location for sustainable financing’”. 

The agreement makes it clear that the government considers sustainability risks to also be financial risks, but Piemonte said this was “not necessarily knowledge that is not already being addressed by the European Union”. The agreement is also missing a clear commitment to promote investor engagement in Germany – another recommendation of the sustainable finance committee – he said. 

Volker Weber, Chair of German sustainable investment forum FNG, also called for a “clear commitment” to oppose gas and nuclear in the Taxonomy. He welcomed the continued commitment to develop Germany into a sustainable finance centre, and said that the government should develop a new sustainable finance strategy more closely aligned to the recommendations of the committee.  

Markus Muller, Global Head of the Chief Investment Office of Deutsche Bank’s Private Bank, said it would welcome a standardised approach on ESG ratings, which the agreement supports, to “provide transparency and comparability for investors and clients on their transition pathways”. Muller echoed the coalition’s support for the CSRD, saying that current reporting standards and requirements for non-financial disclosures are “fragmented”, and that it is “key that reporting requirements are harmonised, remain workable and proportionate”. 

Christian Klein, Professor of Sustainable Finance at the University of Kassel, said that while it was good that sustainable finance was mentioned in the agreement for the first time, he could find nothing really surprising or ambitious. “‘Climate risks are financial risks’ – anyone who hasn’t recognised this has a problem with their risk management”, he said. “With these few points the goal of making Germany the leading centre will not succeed. But who would have thought two years ago that the term sustainable finance could even appear in a coalition agreement?”