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Financial structures for the future - the time has come to take action

02 Apr 2019

Financial structures for the future - the time has come to take action

The impressive number of school students protesting worldwide in favour of climate protection each week is growing. The image they perceive as their future is anything but rosy, and they are holding those accountable who can (and indeed must) make the decisive changes. Their demand is that something must finally be done soon, which also fuels the general debate in Germany. Voices in this regard are being raised in all echelons of society. In political and economic circles, the main issue is to firmly entrench binding framework conditions to facilitate sustainable action. After all, the market alone cannot cope with the necessary change. Recently a committee of secretaries of state for sustainable development advocated establishing Germany as the leading location for sustainable finance. Are these plans sufficiently far-reaching in nature? Will this enable the right incentives to be defined? This was recently called into question in a commentary released in Germany’s financial industry daily “Börsen-Zeitung”.

The buzzword sustainable finance conceals a key topic that applies to a decisive degree to Germany as a business location – both nationally as well as in a European context. What is at stake is no less than the future viability of entire industrial segments and accompanying financial structures and, not least, how these actually serve society in the long run. While climate protection certainly is one of the most urgent challenges, it is not the only one we will need to face.

The Deutsche Börse Group, as co-founder of the “Green and Sustainable Finance Cluster Germany” endorses the topic and the discussion in this regard. We believe it is our responsibility to commit ourselves and drive economic change in the direction of increased sustainability. A key role is to be assigned to the financial industry in this regard, especially in terms of risk measurement and capital allocation.

For this reason, the Cluster and the WWF published a policy road map in time for the meeting of the committee of state secretaries. This policy road map provides impetus for the German federal government’s strategic positioning in order to foster the transformation of Germany as a location and also do justice to our responsibility within a strong Europe. The road map identifies key topic ranges for the coming years. Hence, in terms of transparency and disclosure, with the aid of a classification, first of all a general consensus is to be reached on what is deemed to be sustainable. The second step will be to make sustainability aspects transparent. For instance, consumers should be systematically informed about finance products of every description prior to contracting. The fact that policy currently lags far behind the zeitgeist in many respects may be open to criticism. It would be unfortunate, however, if a key topic were to fall prey to excessively general criticism. After all, these are important steps in a field that will make a substantial contribution towards the sustainable stability of the finance sector and the future development and security of Germany as a location.

Defining framework conditions

Interventions in the market are viewed with absolutely undue scepticism in Germany. This is why the road map mentioned focuses on the framework conditions to be adjusted to ensure decisions in conformity with market conditions but also in the interests of a viable and sustainable future. We are at the very starting point, and it is not evident at present that self-assumed commitments and other instruments derived from the tool box of conventional financial schools will turn out to be effective fast enough. We need a capital allocation that – in addition to the hitherto usual key financials – also monetarises and analyses entrepreneurial strategies in dealing with challenges such as climate change. And we need a form of risk management that identifies necessary transformation processes in the business models, based on medium to long-term scenarios. At this juncture, corresponding systemic incentives by the finance industry must come into play. For example, allocation criteria within the scope of lending and investment processes should be pegged to sustainable orientation of the enterprise in question. In this way, we can actually make the positive repercussions of financial services on socially defined goals transparent. A further important point is that if we take account of sustainability risks correctly, then sustainability and returns should no longer come at each other’s expense.

Opportunities of the capital market

We also perceive immense opportunities that will be opened to us by the capital market as a fundamental system with huge leverage and by the financial sector as a cross-sectional industry to co-design a truly sustainable economy. This will call for a great deal more than “green finance products”. The necessary transformation process encompasses the entire location and is in the process of embracing the real economy as well. And it has already been under way for quite some time. However, according to everything we can possibly know today, the pace of change is far too slow. And this is exactly where the policy road map adopted by the secretaries of state now enters the picture. The real economy is waiting for concrete guidance and calls for transparency and planning certainty. Being a powerful economic location, Germany should quite deliberately play a trailblazing role in this regard. 
It is most probably true that the best specific solution in each case will need to be found in free competition. And this may lead to things ultimately looking completely different from what appears to be conceivable at present.

Defining the right parameters

Free markets require clear framework conditions. And these result from holistic assessments of the opportunities and risks involved. This has not been adequately taken into account to date. Sustainability in the sense of not including the long-term consequences of economic action and the resulting costs constitutes a market distortion that will need to be resolved.

Relying on the self-regulating powers of the markets alone will not do the trick. Political framework conditions are necessary in order to advance the process as a whole. This will include active dialogue with Brussels and ambitious implementation of the content adopted by resolution. Only in this way can we ensure that Germany will assume a role in shaping destiny. Even though it would be desirable to implement these plans even faster or more deliberately (in accordance with the youngsters’ demands each Friday), the federal German government is certainly in the process of making the right changes. 

The author is Managing Director of the Green and Sustainable Finance Cluster Germany e.V. and Head of Group Sustainability of the Deutsche Börse Group, both located in Frankfurt/Main. 

The original German version of this article was first published in Börsen-Zeitung on 30 March 2019.

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