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Sustainable finance

Sustainable finance

Current global developments such as climate change, but also migration, progressing digitalisation and the establishment of social standards present politics, society and business with great challenges. This upcoming transformation process will also have a strong impact on capital markets. Which aspects are key for sustainable finance? What type of framework and structures are needed? And which initiatives are driving the subject?

What is sustainable finance about?

Current global developments such as climate change, but also migration, progressing digitalisation and the establishment of social standards present politics, society and business with great challenges. High funding requirements will be needed globally for the sustainable reorganisation of whole branches of industry, the achievement of the 2-degree goal and the realisation of the United Nations’ Sustainable Development Goals, but also, for example, financial compensation of damage as a result of climate change.

Even though there is a growing awareness of new opportunities and risks this change involves, and sustainable finance is increasingly gaining attention in the public eye, the economic implementation on the market is still a significant way behind this and needs to catch up. In order to take account of these changes in the near term, there will have to be a rethink in the financial industry and concrete structures will need to be established – the fundamental inclusion of sustainability criteria in the entire financial sector is essential. This specifically means, for example, that investment strategies that previously led a niche existence, such as medium- to long-term impact investing, need to increasingly reach the mainstream of international capital markets.

Ultimately, it is a matter of ensuring stability and sustainability of financial markets by taking the impact of business activities, the consideration of long-term opportunities and risks in the core business and sustainability criteria into account as the foundation of capital expenditure and investment decisions. Only in such an environment the financial services sector can fully live up to its responsibility in financing global transformation processes.

Role as an infrastructure provider

As an infrastructure provider, Deutsche Börse not only aims to provide markets but actively shapes them as well. It does this in awareness of its public service mandate and with the aim of establishing transparent and secure structures of integrity. It is precisely in this area that a stock exchange makes its contribution to society and fulfils its responsibility of sustainable development. This is because sustainable organisation of the financial industry is closely connected with future economic and social development and maintaining Germany’s attractiveness as an economic centre.

This imminent transformation of the financial markets can, however, only succeed by joining forces. That is why Deutsche Börse has launched the “Accelerating Sustainable Finance” initiative and co-founded the Hub for Sustainable Finance Germany along with the German Council for Sustainable Development.

 

„Accelerating Sustainable Finance“ initiative

Accelerating Sustainable Finance is a joint initiative with significant players in financial centre of Frankfurt. It has the aim of developing sustainable solutions and new structures for the capital market with combined expertise.
Participants who, for example, include representatives of financial institutions, rating agencies and NGOs, have shown their willingness to do this by signing the “Frankfurt Declaration”.

Accelerating Sustainable Finance 2017

This declaration attests to the signatories’ intent to define a framework for a sustainable financial sector and to put a variety of initiatives in motion to this end in financial centre of Frankfurt. These include identifying innovative business areas and responsible risk management. The idea is to drive forward the holistic mobilisation of sustainable financial market infrastructures as a means of supporting positive development of business and society, while affording the essential protection of our natural environment.

Specific content on the topics of sustainable products and services, impact investing, financial inclusion and ESG data is currently being developed in working groups. Aspects such as regulation and the achievement of the UN’s Sustainable Development Goals also play an important role in the process. In addition, the Accelerating Sustainable Finance initiative maintains a close dialogue with all the important sustainability initiatives both nationally and internationally.

Hub for Sustainable Finance

Deutsche Börse and the German Council for Sustainable Development (RNE) announced their latest strategic collaboration at the start of September. The two partners have set up a Hub for Sustainable Finance (H4SF) to coordinate their sustainability activities in the financial sector with the inclusion of additional national and international players and initiatives, and to further develop these for Germany. In addition to the German Council for Sustainable Development and Deutsche Börse, the steering committee also includes the Hessian Ministry of Economic Affairs, a representative of Deka Bank who is also a member of the steering committee of the High-Level Expert Group in Brussels, the Principles for Responsible Investment (PRI), a United Nations initiative, and KfW group. The focus is on aspects of regulation and market-oriented instruments as well as criteria that promote sustainable development of the financial system.

For example, the Hub for Sustainable Finance currently discusses key theories on the development and strengthening of a sustainable financial sector in Germany. These will serve as the basis for concrete recommendations to the new German federal government and take account of the most important points from the interim report of the European Commission’s High-Level Expert Group on Sustainable Finance, the PRI Germany roadmap, the living document on Sustainable Finance by the German Council for Sustainable Development, the objective of the Accelerating Sustainable Finance initiative and the Financial Stability Board’s “Recommendations of the Task Force on Climate-related Financial Disclosures”. A common feature of these initiatives is that they have been carried out and published in parallel.

Networks and partnerships

The topic of sustainable finance is gaining in global importance with corresponding structures developing on the market. However, these can only be established together. As regards our initiatives and their integration potential, we regularly engage in dialogue with our partners in business, society and politics – both at national and international levels. In addition to our collaboration with the German Council for Sustainable Development (RNE), we are active as a member, and on the board, of econsense, the Forum for Sustainable Development of German Business. Also the exchange with other financial venues – for example, in the United Nations’ Sustainable Stock Exchanges (SEE) initiative, the Network of Financial Centres for Sustainability and the Sustainability Working Group of the World Federation of Exchanges (WFE) – gives us important momentum to further advance sustainable finance.

Sustainable products and services

Currently, Deutsche Börse Group’s offering via its index subsidiary STOXX includes around 100 sustainability indices, e.g. the STOXX® ESG Leaders and STOXX® Low Carbon index families. The volume amounts to around €12.5 million and there are currently 2 ETFs: the FlexShares STOXX® Global ESG Impact index and the FlexShares STOXX® US ESG Impact index. We see it as our responsibility as a capital market organiser to further advance this topic in economic implementation.

 

The importance of ESG data

In connection with sustainable finance, ESG data (environmental, social and governance data) and its publication are of great significance. Core business-based ESG data allows a more holistic and above all forward-looking measurement of company value and is indispensable for extended financial key figures. This is because climate and environmental risks, social factors and aspects of corporate governance will play an essential role in risk assessment for the financial sector.

The information provided as part of companies’ reporting serves investors, asset owners and asset managers, for example, to be able to better identify opportunities and risks associated with their investment decisions and make sound decisions. By collecting ESG data, companies can identify risks along their value chain and manage these accordingly in order to ensure medium and long-term business success.

And last but not least, more transparency about possible cross-sector risks provides greater stability on capital markets. According to the international expert committee’s Peer Review Report, which evaluates the implementation of the German sustainability strategy every four years, the financial industry’s contribution has, however, so far been underdeveloped. Deutsche Börse supports the initiative through the Task Force on Climate-related Financial Disclosures (TCFD) as an important stimulus to more intensively discuss these risks and effects as financially relevant variables.

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