Sustainable finance and ESG

The climate crisis and resource management that does not take sustainability into account lead to a variety of financial and material risks. 20 to 30 per cent of the market value of listed companies depends on the socially cost-free combustion of fossil fuels.

If the Paris Agreement target of limiting global warming to 1.5 degrees Celsius is met, at least USD 267 billion of balance sheet assets will become stranded assets globally. These assets will have to be written off, as the associated raw materials can no longer be burnt.

At the same time, the costs of extreme weather events such as storms, droughts and floods are rising. 500 of the world's largest companies expect climate damage of around 500 billion dollars over the next five years.

In addition, social factors are increasingly influencing the performance of investments in the economy. Reputational risks such as breaches of ethical standards, product safety and environmental and health risks posed by products are on the rise. It is therefore becoming increasingly important to be able to assess whether a company's management is adequately prepared for these risks - and is taking the right steps to adapt its business strategy.

At the same time, customer demand for investments that focus on sustainability is increasing. Green bonds are a popular tool for communicating sustainability to investors and demonstrating that a company is planning for the long term. In 2018, sustainable funds and mandates in Germany increased their market share to 4.5 per cent. Customer deposits from specialist banks that invest exclusively according to sustainability criteria grew by around eight per cent.

The Sustainable Finance Action Plan has defined 10 packages of measures that have been translated into corresponding regulations (EU Taxonomy, Disclosure Regulation and MiFID II). The new regulations include standardised definitions and standards for sustainable investments in Germany. In addition, the EU requires all financial market players to disclose the risks relating to sustainability as well as relevant management approaches and the impact of decisions on sustainability factors such as CO2 emissions or water consumption. The legal requirements are not yet fully developed at this point in time and are therefore subject to a high rate of change.

The aim is to redirect 180 billion euros annually into sustainable investments by 2030. In addition, the aim is to anchor environmental, social and governance (ESG) factors as a standard in Risk management and to promote transparency and long-termism on the capital market. The EU's requirements and the growing demand for sustainable investments will influence a wide range of practices and functions, such as data utilisation, investment decisions, risk management, controlling, reporting, back office and marketing.