With its action plan for financing sustainable growth, the EU Commission put sustainable finance on the agenda in 2018: it uses ten action areas to define the financial sector’s contribution to sustainable development and is thus driving its transformation more vigorously than before. Until now, the financial industry had been held responsible only in part. The EU’s action plan encompasses the entire value chain: from incentive schemes for long-term business management to guidelines for advising institutional clients and small investors, to reporting obligations of financial institutions.
As Germany’s state-owned promotional bank, KfW is actively involved in shaping this transition to a sustainable financial system and has been contributing its expertise to the EU Commission’s Technical Expert Group on Sustainable Finance since 2018.
Why sustainable finance?
We are increasingly confronted with unforeseeable consequences of climate change and resource scarcity – concerted action is needed to adapt to this new reality. Here, the financial system has to play a key role: it must be transformed in order for private capital to be redirected to more sustainable investments. The EU aims to generate more sustainable economic growth while ensuring the stability of the financial system and promoting greater transparency and a longer-term perspective. The leverage effect of the financial sector must be harnessed for sustainable development in order to meet these ambitious requirements.
The driver of the financial industry
The financial requirements for implementing the global Sustainable Development Goals (SDGs) adopted by the international community in 2015 are immense. Estimates are around 1.5–2.5% of the annual global GDP. Large-scale projects in the areas of renewable energy sources, water and wastewater, or in agriculture must be financed and supported. The financial industry thus has a key role to play in sustainable development as a donor to the economic system.
The SDGs and the Paris Climate Agreement are two essential pillars of our new KfW sustainability mission statement. As the promotional bank of the German Federal Government and the federal states, we help to implement political decisions with financial incentives. But we also want to set standards on the market and apply our technical and financing expertise in consulting.
Can the financial sector be the key leverage for sustainable development? How realistic is this idea? These are the questions in the first edition of KfW’s new podcast “ausgesprochen nachhaltig” (available in German only). From Fridays for Future to EU projects in Brussels to KfW’s role in the transformation of the financial sector: Alexander Baunach, KfW employee in corporate strategy and sustainability management, discusses the topic of sustainable finance with KfW Sustainability Officer Dr Karl Ludwig Brockmann and his colleague Nico Schützhofer from different points of view.
ausgesprochen nachhaltig – #1 Sustainable Finance
What are the origins of sustainable finance?
Milestones in development
The UN Framework Convention on Climate Change is adopted at the Earth Summit in Rio de Janeiro and enters into force in 1994. The industrialised countries commit to providing financial support to developing countries in the fight against climate change.
The Principles for Responsible Investment (PRI) are launched. The UN Finance Initiative reflects the increasing importance of environmental, social and governance issues in investment decisions. KfW signed the PRI in 2006, thus acknowledging the special significance of sustainability aspects for financial investments. KfW reports on the implementation status of the PRI in an annual assessment report.
At the UN Climate Change Conference in Copenhagen, the Copenhagen Accord treaty, which was merely “acknowledged”, mentions the target of limiting global warming to less than 2°C compared to pre-industrial levels. The industrialised countries are committed to providing up to USD 30 billion for climate change mitigation in developing countries between 2010 and 2012. Starting in 2020, USD 100 billion is to be made available annually.
The United Nations adopts the 2030 Agenda with its 17 SDGs. Unlike previous programmes, the Agenda applies equally to industrialised, emerging and developing countries. Sustainable development is to be promoted by fundamentally reorganising structures and processes and by developing new ways of thinking and acting. Business and civil society stakeholders are explicitly involved alongside political actors.
The agreement to limit global warming passed in Paris is adopted. The global climate treaty reiterates the need to expand climate financing – both for lower-emission development and adaptation to climate impacts.
In the wake of the COP21 climate conference, the G20 finance ministers and central banks commissioned the Financial Stability Council to draw up recommendations for uniform climate reporting. The Task Force on Climate-related Financial Disclosures (TCFD) was formed for this purpose.
KfW Group has supported the TCFD since October 2018. As part of our Roadmap Sustainable Finance, we created a separate working group in 2018 which intensively reviews how the TCFD recommendations can be most effectively integrated into our processes.
The EU Commission adopts the action plan: financing sustainable growth. “Sustainable finance” spans not only climate and environmental aspects, but also economic and social issues, and defines the role of the financial industry in sustainable development. A classification system (taxonomy) should, among other things, define sustainable investments uniformly for the financial sector and thus create clarity.
The technical expert group for sustainable finance starts its work. It supports the European Commission in implementing the action plan to finance sustainable growth. KfW is a member of the TEG and contributes its expertise through the Group Officer for Sustainability, Dr Karl Ludwig Brockmann.
The TEG presents a report on the transparency and disclosure of sustainability aspects by companies. The recommendations it contains are to be incorporated into the non-binding guidelines for the EU’s non-financial reporting.
The TEG publishes an interim report for a voluntary EU standard for green bonds which aims to build on and be compatible with existing market practices. The standard is to be closely linked to the new EU-wide classification system for environmentally sustainable economic activities (taxonomy).
KfW and sustainable finance
KfW promotes sustainable development in different ways. The focus is on its role as a promotional bank. It finances projects around the world in the interest of environmental protection and climate change mitigation or poverty alleviation. Other key levers are climate- and resource-friendly banking operations and the role of a responsible employer – side-by-side with comprehensive reporting.
KfW has committed itself to sustainable finance with the aim of promoting sustainable activities in the financial industry as a whole. It wants to set standards and broaden the scope of the issue through its involvement in various initiatives.
Central elements are:
- Setting standards – e.g. by issuing “Green Bonds – Made by KfW”
- Financing ground-breaking flagship projects such as the Clean Oceans Initiative
- Involvement in political initiatives, e.g. the UN Principles for Responsible Investment (PRI) or the Technical Expert Group on Sustainable Finance (TEG) of the EU Commission
- Defining new corporate goals and integrating sustainability management into the corporate strategy.
Sustainable finance was also the theme of the annual KfW Stakeholder Dialogue, which was held in Berlin on 26 February 2019. Stakeholders from politics and society discussed the transformation of the financial markets and their expectations of KfW.