‘Strengthen disclosure rules, embed ESG in state pensions and get hands-on with EU policy’, German government told by advisors

Sustainable Finance Committee makes first set of recommendations and opens consultation

The German federal government has been advised to strengthen ESG reporting rules for corporates and investors in the country, integrate sustainability criteria into state-subsidised pension products and become a driving force behind the next EU Action Plan on Sustainable Finance.

Germany’s Sustainable Finance Committee – 40 government-appointed experts from investment, finance, science and civil society tasked with helping develop the country’s approach to ESG – put out its interim report yesterday, outlining its thinking so far and calling for feedback.

Similar bodies have been set up by governments around the world (including New Zealand, Canada, the UK, Japan and France) and in some cases have been the catalyst for sweeping rule changes for financial markets.

“In its capacity as an investor, the public sector is one of Germany’s largest institutional investors,” the report says. “It should strictly align its capital expenditures… with given political goals and should abide by sophisticated sustainability benchmarks (such as the Climate Transition Benchmark or the Paris aligned benchmark) prepared by the EU Commission’s Technical Expert Group,” it advises, referring to the two climate benchmarks being developed under the EU’s current Action Plan on Sustainable Finance.

Karsten Loffler from the Frankfurt School of Finance & Management is the only official member of both the European Commission’s Technical Expert Group on Sustainable Finance, which is advising it on the benchmarks, and the German Sustainable Finance Committee; although KfW Banking Group is also represented on both bodies.

“Sustainability criteria must be integrated in binding fashion into state-subsidised financial products… for example, in compliance with conventions of which Germany is a signatory” the report continues, namechecking Germany’s ‘Riester’ and ‘Rurup ‘public pension programmes. “The same applies to the products of the development banks and all financial institutions under public law.”

Germany’s mammoth savings bank sector “should set an example by aligning itself with sustainability and climate goals,” the experts recommend.

There has been much talk about Germany issuing a green sovereign bond – a move the report says would have “a signalling effect that should not be underestimated”. However, it warns, a transaction would only be effective if it was accompanied by “a change in budgetary allocations”.

An effective carbon price, public guarantees, climate stress tests and corporate scenario analysis also featured among 53 “approaches to action” laid out in the report.

On disclosure, the experts says there should be a push towards ‘integrated’ reporting (in which sustainability and financial reporting are combined, to ensure the former is taken as seriously as the latter). This should be expanded to “medium-size joint-stock companies, SMEs and companies exposed to particular risks,” it adds, urging the government to “require exchange-listed companies to apply the Taskforce on Climate-related Financial Disclosures recommendations to their reports from 2020.”

The Committee advises the government that “without intervening in the market via regulation, the public sector’s impact can be significant on account of the signalling effect its actions have on other financial market players”. However, it strongly recommends that the German government wades in more forcefully to the debate around EU-level climate finance policy.

Several insiders say that German politicians and industries have pushed back particularly hard on EU sustainable finance plans over the past two years. Its central bank, the Bundesbank, has been more conservative than many of its peers in its approach to green bonds and the potential to integrate sustainability into monetary policy, too.

But according to the Committee, the country’s EU Council Presidency in the second half of 2020 “offers an opportunity” to further engage with and influence the EU Action Plan on Sustainable Finance and its next iteration, known as the ‘renewed strategy’.

“The German federal government should prioritise the ongoing update of the European sustainable finance strategy and the dossiers related to it, both substantively and in respect of its collaboration with other EU Member States,” it says, advising the federal government to “participate in shaping and implementing the EU Green Deal and the EU Action Plan, particularly the implementation of the taxonomy”.

The final recommendations from the EU’s Technical Expert Group on Sustainable Finance on what the green taxonomy should look like are due to be published next week. The European Commission will establish a body to oversee its implementation later this year.

Germany’s Sustainable Finance Committee was set up by the Federal Ministry of Finance and the Federal Ministry of the Environment, Nature Conservation and Nuclear Safety last June. It is chaired by Karsten Loffler and its Deputy is Kristina Jeromin from the Deutsche Borse. For a full list of members, see here. It has met three times since it was formed last summer, and published its first position paper in October. In January was given its own office with two staff.

The interim report is open for feedback until April 3, and a final report will be developed for publication in September. Market feedback “will be instrumental in further developing Germany’s sustainable finance strategy,” says the group.