A growing number of investors are making their decision based on climate risks and sustainability criteria. Although EU lawmakers are working on making the valuation of companies more uniform in the EU taxonomy, financiers want binding measures. EURACTIV Germany reports.

At the Frankfurt School of Finance and Management, investors, entrepreneurs and consultants have started discussions on today’s hottest topic: the climate. In particular, they have been gathering to discuss what the EU Action Plan for Sustainable Finance means for the industry.

For example, it is hoped that EU regulations will be more clear as to what is meant by the term ‘sustainable’, Jan-Menko Grummer, a partner at Ernst & Young, said during the ceremony.

“If we really want to act sustainably fast, in industry and in business, then we need investments to be sustainable. Because that’s fuel in the engine of our society,” he added.

Capitals are always looking for the best hosts. The only question is how to identify the best host.

The financial world is currently faced with the challenge that it is often impossible to assess the ‘greenness’ of one’s own investments. In a large number of cases, too little information is available about the companies in question. Also, there is often insufficient time and experts to comprehensively assess the effects of a project. Establishing uniform standards is, therefore, one of the main objectives of the EU Action Plan.

Lars Röh, attorney at Lindenpartners, warned, however, that there could be the problem that two definitions of sustainable investments could still apply: the definition from the EU’s Taxonomy Regulation or the so-called Regulation on disclosures relating to sustainable investments (Disclosure Regulation). The bar is set higher in the Taxonomy Regulation.

In any case, it will be exciting to see how products, which are considered to be sustainable today, are categorised, said Röh.

The long-term goal is for the Taxonomy Regulation to set the standard, explained MEP Sven Giegold, economic and financial policy spokesman for the Greens/EFA Group. Giegold joined the conference from the European Parliament via video broadcast.

Following the conclusion of the Paris Climate Agreement and the UN’s 2030 Agenda for Sustainable Development, it quickly became clear that the necessary capital could not come from public budgets alone.

To achieve the goals in both the agreement and the agenda, Europe would need to commit to an annual investment requirement of between €190 and €270 billion to achieve the goals.

The EU Commission commissioned a High-Level Expert Group on Sustainable Finance (HLEG) to work out ways to mobilise private capital and steer the European financial system towards sustainability.

The action plan was presented in 2018, and since then, work has continued on its implementation. At the end of March this year, the European Parliament agreed on a common position on taxonomy, and a conclusion among EU ministers is expected in the next few weeks.

A Green Bond standard is also currently being refined.

According to Giegold, this strategy, will not only be regulating the green niche but should, above all, extract capital from climate-damaging areas.

“We don’t just want a piece of green cake. We want to green the whole bakery,” he added.

The financial sector is a particularly interesting partner for the ecological restructuring of the economy. Giegold said that the sector only finances investments that pay off.

“And it only pays off if we pursue a consistent environmental policy. The green financial sector can only expand if we set signals such as the carbon tax.” Giegold said.

That is because green financial markets are not a substitute for climate policy but depend on strong framework conditions.

This also applies to disclosure obligations. For example, large banks must already disclose their climate risks according to current regulations. According to Giegold, the same is now needed for insurance companies and large funds, and not just for individual ecological financial products.

Fabian Lander, head of Corporate Finance and Sustainability at VW Immobilien, also demands that the new EU regulations be binding if they are to take effect, arguing that the current conditions are too flexible, which leaves too much room for interpretation.

However, the German government is currently against the EU taxonomy having a binding effect.

According to Giegold, “that needs to change”, a stance repeatedly taken by the European Parliament.

Artificial Intelligence for the valuation of companies

In addition to the more stringent classifications, there are other trends in the industry to try to give customers a more reliable overview of a company’s activities.

For example, Dutch asset manager NN Investment Partners is currently working on a data set and algorithm to automatically classify companies using Artificial Intelligence (AI) and separate from other similar companies until actual data on that company is available, explained analyst Daniel Peter.

The search for reliable sustainability criteria is becoming more and more relevant. According to the Frankfurt School of Finance and Management, only uniform standards can mobilise enough capital to achieve the Paris Agreement’s climate targets.

It should be clear which risks accompany which investments. After all, the only thing at stake here is money.

(Edited by Benjamin Fox)