A sleeping giant finally awakening? Full weight of financial sector could crank up German climate action

As Clean Energy Wire sets out to explore the German finance sector's role in the country's climate and energy policy, I take a minute to reflect on what diving into this vast segment of the economy as a reporter has taught me about the difference between action and ambition and why a wealth of data does not necessarily mean that a subject is properly understood. The country of the Energiewende still has to gain some ground in to exploit the concept of green finance - but if it manages to tap into the full potential of the 'sleeping giant' finance, this could mean a strong and lasting push for climate action.

Questions about money are a constant companion of anyone reporting on the energy transition and the challenges of climate change. What will it cost to roll out renewables and energy-efficient technology? How expensive will it be to shield the country from the worst effects of global warming? Who bears the financial responsibility – and has the financial means – to make sure the economy cuts down on greenhouse gas emissions? These issues come up time and again.

Yet when I set out to investigate the financial sector's involvement in Germany's Energiewende and the country's efforts to comply with international climate accords, I was surprised at the piecemeal approach of banks, insurers and asset managers - arguably the experts in financial matters. To be sure, the expansion of wind and solar power and the energy-saving projects of many companies would not have been possible without the financial expertise of banks that ensured proper funding. Likewise, insurance companies have long taken climate risks into account and shrewd asset managers have benefited from investments in renewables since day one of the energy transition.

What is lacking in Germany, however, is a systematic framework that streamlines the many individual financial decisions on energy and climate, and channels them coherently so money flows out of carbon-intensive projects and into low-carbon alternatives. Not only is aligning financial flows and climate action a key demand of the Paris Agreement, many companies, financial or non-financial, also say they need a proper regulatory environment for climate targets to ensure investments aren’t stranded, but rather pay off, as the economy transitions to a more sustainable pathway.

There is no lack of sustainability reporting among financial companies, and a wealth of national and international green finance initiatives give the impression that something is already being done to dovetail finance with climate. But my first stint covering Germany's financial industry quickly dislodged any notion that the country of the Energiewende is breaking ground in this regard as well. "Germany is an international laggard in addressing fossil investment risks," I was told by the sustainability head of Deutsche Börse, the German stock exchange, at a conference organised by the Green and Sustainable Finance Cluster (GSFC), an association funded by the country's financial industry to achieve greater planning security regarding the impact of climate policy on their business.

The German finance world seems to have recognised that industry, policymakers and civil society in other countries are better at cooperating on the financial sector's role in climate action, for example in France or the UK, and that impending EU legislation on sustainable finance may drastically change how banks and others do business. Even though many of Germany's "big finance" players are still criticised for their attachment to fossil fuels, and one finance researcher I spoke with even concluded that markets are betting international climate targets won’t be met, they seem genuinely concerned about the risks of doing nothing. They do recognize the threat from climate change itself, from regulatory intervention, and from other countries divvying up a fast-growing business segment while Germany looks on.

As it happened, the German government appeared to have come to a similar conclusion. Just as I started working on CLEW's green finance package, events came thick and fast. In February, a government committee proclaimed Germany should redouble its efforts and aim to be "a leading location" for green finance. In May, Chancellor Angela Merkel called on public banks to acknowledge climate change as one of the most pressing issues they are facing. And in June, a sustainable finance council consisting of the financial sector, industry, civil society groups and scientists was launched to buttress Germany's green finance ambitions.

''Germany's finance sector cannot become green without a political plan,'' a council member told me shortly after the launch. At the same time, he was confident that the country has what it takes to tap the potential of the "sleeping giant" – finance - to boost climate action. A source in Germany's finance ministry hinted to me that the national budget could soon be screened for its green credentials and to launch a green government bond – raising the possibility that this could happen more quickly than many believe today. We’ll see if the finance industry is happy with the government's newfound drive at the next GSFC event in October.