Introduction
German corporates, and particularly high carbon-emitting companies, are faced with significant risks and opportunities when it comes to sustainability. The re-pricing of some German utility and car company share prices, in part due to the spread of clean technologies and regulations, are a telling sign of these risks. However, research[1] concludes that it is possible for major industrial sectors to reach net-zero emissions by 2050 with the right policy framework and investor support.
Germany also lies at the heart of some of the technologies leading the fourth industrial revolution but while Germany has long been a leader in renewable energy, more recently it has been slipping down global league tables.[2] Maintaining the country’s leadership in Europe needs to be safeguarded.
German corporates are also receiving more shareholder resolutions and questions as investors add Environmental, Social and Governance (ESG) factors into their investment strategy. Companies therefore need to understand the increasing array of metrics they are being measured against, particularly as they relate to climate and the Sustainable Development Goals (SDGs).
Financial regulators and the EU’s Sustainable Finance Action Plan are also moving sustainability deep into the core activities of companies and financial institutions. For example, the Action Plan will require pension funds to ask members for their ESG preferences and to incorporate ESG into their investments.
While some German corporates have strong sustainability credentials, many are not yet integrating ESG into their employee pension schemes. Doing so could have the added benefit of helping to retain and attract employees and match societal expectations.
Another important focus of the EU Action Plan centres around disclosure. This is essential as a 2018 study published by DWS and the University of Hamburg reveals ESG disclosure has the weakest correlation to financial performance.[3]
With the EU Commission having updated guidance to member states on the EU Non-Financial Disclosure Directive in July 2019, we expect that the disclosure requirements on companies will continue to expand. Disclosure requirements will cover both the risks and opportunities of ESG issues and climate change on a company and also how a company has positive and negative impacts on society across a range of ESG issues particularly climate change.
Improved disclosure will be accompanied by efforts to ensure climate friendly lobbying practices and business model changes whereby executive compensation is aligned to corporate sustainability goals.
At DWS, we continue to deepen the incorporation of ESG factors into decision-making and into our investee engagement, building on our long track-record. We all our role to play, and Germany and Europe should step up together.
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