Check against delivery

Ladies and gentlemen,

Innovation is at the heart of nearly every societal transformation. For example, innovations in the production of fertiliser and the use of crop rotation in the 18th and 19th centuries allowed farmers to significantly increase their productivity and reduce labour. Vast numbers of people moved from the country into cities to find work in the emerging factories. Our primarily agricultural economy transformed into an industrial economy.

Now we are faced with structural transformation once again: structural transformation from a high-carbon economy to one that is much less carbon-intensive and much more sustainable. This will affect energy companies in particular, but also has consequences for businesses across all industries. And of course, there are also consequences for us as individuals: how we live, how we travel and what we consume.

As in earlier periods of transformation, the financial industry is a key driver of change. Just think of the construction of the railways in the 19th century, which was primarily financed with the aid of banks. The principle that applied back then still holds true today: capital should be directed primarily towards projects with strong prospects. Projects associated with a high level of uncertainty or that promise only minimal returns, on the other hand, should only be financed with high risk premiums. But this mechanism only works when all parties involved – credit institutions alongside institutional and retail investors – receive all of the relevant information about the projects. Which means transparency is more important than ever.

For us as financial supervisors, the issue of sustainability is hugely important – with regard to the companies we supervise, but also with regard to consumers of financial services who want to make their own contribution to the sustainable transformation. In our Sustainable Finance Strategy, we have set out the challenges we see in this transformation and the role BaFin has to play. This strategy will be published today.

For us, three points are essential:

Firstly, we need robust institutions capable of fulfilling their role in our economy over the long term. To this end, they must have their climate risks under control – something Professor Buch has already emphasised in her speech.

Secondly, we need more clarity. Supervised companies can only effectively manage transition and physical risks in their own balance sheets or in their financial products or services if they can access reliable data from companies in all sectors of the economy.

That brings me to my third point: products and services should only be labelled and sold as sustainable if they actually are sustainable. Greenwashing destroys trust. It is one of the greatest risks to financing the transformation. At BaFin, we are taking decisive action to combat it.

To begin with, I would like to talk about the role of financial institutions. As I have said: for sufficient capital to be directed towards sustainable investments, a stable financial system with resilient players is essential. We know that not all innovations and projects for a climate-neutral economy will be successful. Many will fail. Such is the nature of these endeavours. We need banks that can withstand failures and continue to finance promising projects. Even when the economic headwinds pick up and the rate of credit defaults rises. It is above all in times of crisis that strong banks are needed. The transformation must not be jeopardised by a lack of capital.

Together with the Deutsche Bundesbank, we at BaFin work to ensure the proper functioning, stability and integrity of the financial system. This also means ensuring that the companies under our supervision have their sustainability risks under control and take the appropriate action when these risks grow. Allow me to be more specific:

Climate change is increasing the risks for our economy. These include physical risks arising from extreme weather, such as the risk of flooding and droughts. Such events can result in business interruption. For example when farmers are unable to harvest crops due to extreme heat. This has far-reaching consequences for the food industry, but also for other sectors. Another example would be low water levels preventing tankers from sailing on certain rivers, thus disrupting supply chains and production. This in the end has an impact on companies’ solvency, and on banks’ loan collateral.

The issue is compounded by transition risks. These are risks that arise as a result of the transition to a carbon-neutral economy. Many companies are threatened with high costs: they need to transform their business and drastically reduce their energy consumption. And this doesn’t just apply to energy-intensive sectors like the glass industry, but to all companies in all sectors. With the carbon tax, companies are faced with an increasing tax burden. Private households will be affected by the Heating Act (Heizungsgesetz), and there are further restrictions to come. Some property owners will have difficulty meeting these expenses, and some may even fail to cover the costs. This will also impact loan collateral.

But this does not mean that sustainability risks represent a new kind of risk for us. On the contrary: they are reflected in the familiar risk categories of “market price risk”, “credit risk”, “underwriting risk”, “operational risk” and “strategic risk”.

But climate risks are risk drivers with specific characteristics. They pose a challenge to existing methodologies and internal models. Institutions must therefore work on better identifying, measuring and managing these risks. In order to do so, they need to find answers to the questions: Where exactly are the specific vulnerabilities? Where are concentration risks? Where are we missing data?

In our strategy, we have once again emphasised the importance of appropriate risk management with regard to climate-related financial risks. Just last week, we updated our Minimum Requirements for Risk Management for Banks (MaRisk) and as part of this we incorporated the issue of sustainability.

In setting out BaFin’s supervisory focus areas, we always follow a proportional and risk-based approach and utilise our existing supervisory tools. Practicability is important to us. One thing must always be clear: as supervisors, we do not set climate policy. We are not concerned with the question of what individual projects a bank or insurer is or isn’t financing or insuring. We cannot influence this, and nor would we want to. Companies must make such decisions themselves. Supervisory law should pursue the objectives of prudential supervision, conduct of business supervision and market supervision alone. We reiterate this point in our Sustainable Finance Strategy.

Policymakers can set economic incentives to direct finance flows. They should be aware, however, that less strict calibration of solvency regimes for lending and investment can weaken the financial system. In the long term, this could even jeopardise the transformation to a sustainable society. Green loans and green investments do not intrinsically entail lower risks. The key consideration should always be the individual financial risk. That is why, when it comes to capital requirements, we expressly caution against green supporting and brown penalising factors.

Allow me to move on to the second issue I would like to address today: reliable data. It is here we see the greatest difficulties. We are still missing a lot of data on sustainability risks. Of course, this is in part due to the very long observation periods needed. More reliable data on climate-related financial risks is one of the key areas for action in our new strategy.

In our view, the obligation to improve data quality lies not only with financial institutions, but also with companies in the real economy. Last week the International Sustainability Standards Board (ISSB) published its first two standards for the disclosure of climate and sustainability-related risks. The objective is for companies to provide relevant data on their sustainability risks that is comparable at the international level. More comprehensive European disclosure requirements at the company level will also gradually improve the availability and quality of data. I am thinking in particular of the Corporate Sustainability Reporting Directive (CSRD), in addition to the European Sustainability Reporting Standards (ESRS), which further specify the requirements. BaFin will monitor whether the companies we supervise comply with these obligations.

The third point I wish to address today concerns transparency for consumers and the fight against greenwashing. Investors should be able to decide which products are and are not aligned with their preferences. To do this, they need clear information. Not every consumer can carry out extensive research and design their own sustainable investment strategy.

A high level of transparency allows investors to make well-informed decisions, and to articulate and realise their sustainability preferences.

We ensure that supervised companies comply with their transparency obligations and take their clients’ sustainability preferences with regard to investment decisions into account. And we are very careful to ensure that no German investment fund product is given the label “sustainable” without really earning it.

In practice, we haven’t come far enough. Investors are still not able to determine quickly and easily enough how sustainable a product really is. The information they receive is overwhelming in its extent and complexity. Allow me to give you a few examples: disclosures detail the share of sustainable investments in a product, the sustainable investment strategy followed by a product, and how companies measure the achievement of their sustainability goals. But they contain a great deal more information besides that.

Investors need information that is more easily comprehensible, but they don’t need more information. For example, consumers need to be able to easily determine whether, in spite of compliance with the EU Taxonomy Regulation, a product includes investments in gas or nuclear energy. Or whether a product invests in companies that are already “green”, or in companies that are transitioning towards becoming “green”. It is not enough for this information to be hidden in an appendix.

We all know green is not simply green. It is much more complicated than that. Products need to be labelled in a way that reflects this complexity. The categories included in the current regulation do not achieve this. In my view, three categories would be appropriate:
Firstly, investments that finance activities that are unequivocally climate-friendly, but that may still be new and pioneering. Such investments are often financially risky and therefore better suited to experienced investors with a higher risk tolerance.
These products have comparatively high costs. The market for them is probably not very big. But they can have a significant impact, and the risk of greenwashing is usually low.

The second category would be for “exclusion products”. These products are distinguished from non-sustainable products through the exclusion of certain activities or sectors. Most sustainable investment products available today fall into this category. Their impact in terms of sustainability may be lower, but so are their risks, and they can be produced more cheaply. Their market is relatively large at the moment.

But are they really aligned with investors’ sustainability preferences? Or are they merely placebos? The risk of greenwashing in marketing and sales is relatively high.

The third category is perhaps the most effective: these products finance the transformation, accompanying as it were the development from “brown” to “green”. Their market potential would be large, the financial risks modest, and their potential impact high. However, such an investment strategy is no trivial undertaking. We are talking about active management that evaluates the transformation plans of companies and monitors their implementation. Such investment products would not be cheap, and the risk of greenwashing is high. It would not be enough to invest in companies with nebulous net-zero plans.

Allow me to summarise: There is sufficient demand for sustainable investment products and sufficient private capital to be mobilised. However, the funds are not always being directed to where they could facilitate an efficient transformation.

In order to achieve this, we need strong banks and maximum clarity. We have come very far, but not far enough. A major obstacle is currently the definition and marketing of sustainable products. We must take action here.