And additionally: where are the 180 billion euros a year supposed to come from that are needed in Europe alone to achieve the Paris climate protection targets? If not from the financial industry. Banks, insurers, pension funds and investment funds will raise the bulk of these amounts. Sustainable Finance will therefore keep the financial sector permanently busy - in two senses of the word. But what exactly is financial sustainability all about? And how do you get it into the minds and hearts of financial people?
Three core areas of sustainability in financial institutions
The first is to detect and assess the risks associated with climate change. Then it comes to the allocation of capital, i.e. financing investments in the real economy in a sustainable way. And thirdly, it is about transparency for investors. Let us look at them one by one briefly.
"It is certainly not so much the risk of a storm hitten roof top that‘s calling regulators, supervisors and central bankers onto the scene or the flooded data processing centre of a credit institution," explains Frank Pierschel from German Financial Markets Supervisory Authority BaFin,, "It is the indirect risks, i.e. those arising from the customer structure of these financial companies". (article quoted at present available in German language only, check out BaFin-website). National and international supervisory authorities meanwhile see sustainability risks as a macroeconomic threat with corresponding effects on financial market stability!
Climate and environmental risks are already dormant in the assets and operations of banks and insurers - as credit risk, market risk or operational risk. If storms and floods destroy credit-financed houses (physical credit risk), the question of insurance arises first. Otherwise, the risk is in the bank affecting P&L. Incidentally, the insurance industry is already discussing the scenario of a „non-insurable world“ when global climate warming exceeds 4 degrees!
Sustainability risks become relevant in the short term, especially in the area of market risk: If prices change, e.g. if rating agencies begin to assess the effects of climate change on states and regions, this has consequences. Or emission certificate prices fluctuate strongly.
In the area of operational risks, Raimund Röseler draw attention to the reputation risks, which are too often neglected. Risks "which can arise because banks have overslept the reorientation towards sustainability, for example if business conduct is seen as immoral and legal risks arise". (article quoted at present available in German language only, check out BaFin-website). Here, banks have to take a very close look at who or what they want to finance in the future. After all, stakeholders will probably no longer be as patient as they have been in the past.
Allocation of financial flows
"The financial sector must not forget that it is to serve the real economy ..." wrote Jean-Claude Trichet, then President of the European Central Bank, to bankers shortly after the outbreak of the financial crisis. In other words, sustainable, long-term investments in a socially and ecologically oriented economy that creates real value. Since 2018, the EU Commission's „Sustainable Finance Action Plan“ has clearly called for. And this requires more than just a "negative list", which shows where the bank or the insurer would not invest in. It requires a completely new mindset that begins with the question: "What is our contribution to a world worth living in in the long term?
This is also a question of attitude, of mindsets, although the majority of transparency regulations already exist today. The bank must be able to explain conclusively to investors and customers what it understands by sustainability and how it considers the financial opportunities and risks in relation to sustainability. And this applies to all products, both their own and those of others. "For product manufacturers and distribution companies, this means that in future they will have to take ESG criteria into account when defining the target market and classifying products," explains Elisabeth Roegle, executive director at German Financial Markets Supervisory Authority BaFin the corresponding regulation in MIFID II, and also establishes a link to investment advice, where in future customers will have to be asked "whether the ESG criteria are important to them in their financial investment, and take this into account in the investment strategy and the investment recommendation.“ (article quoted at present available in German language only, check out BaFin-website). Ola, there will be a lot to come for the investment advisors! It will no longer be enough to fill out a customer- questionnaire.
Does not go without profound culture change in the bank
Dealing with new risk classes, new business strategies and decision parameters, far-reaching transparency obligations - all this cannot be transported into the everyday life of the bank with a few board resolutions. The aim is not only to reach the heads of managers and employees, but also their hearts. This is the only way to achieve change. The sustainability managers and the CSR departments of the financial institutions speak from first-hand experience. "The art of thinking about a different reality and translating it into change requires a special mixture of knowledge, attitude and concrete implementation skills," Silke Stremlau, CEO of Hannoversche Kassen, cites from transformation research in her contribution “Sustainability as an opportunity“ which is absolutely worth reading (article quoted at present available in German language only, check out BaFin-website).
And that brings us back to the indispensable foundation of Sustainable Finance. The ability of each individual to think differently and then to let new thinking emerge in reality. Whether a bank board member or an investment advisor in a bank branch, both must be able not only to clearly recognize their previous patterns of thinking and behavior, but above all to let them go. In the end, good strategies differ from bad strategies in this ability of the actors. "One of the quintessential components of a good strategy is the ability to take a step out of the internal storyline and shift viewpoints. The most powerful strategies arise from such game-changing insights", explains the American bestseller author and management professor Richard Rumelt.
Since one does not learn such future skills and insights in passing, the Mindful Finance Institute and the Steinbeis Academy have launched a one-year course of study "Mindful Finance Leadership". Here the participants acquire the skills and insights necessary for the transformation of the financial industry. Sustainable and Mindful Finance" is currently a unique opportunity for the financial industry to work actively in a positive sense on solving challenges in the economic, social and ecological fields. Or as we put it in the positioning paper of the Mindful Finance Institute: "This change will reconnect the industry to the heart of value creation - trust".
In my next blog we will take a closer look at the implementation of Sustainable Finance into corporate culture. I wish you a good time and treat yourself and the environment mindfully.