Workshop on 24 August 2022: The significance of the European capital market for the transformation of the economy in NRW
The transformation of the economy in North Rhine-Westphalia towards sustainability requires significant investment efforts that need to be financed by a broad mix of partners. Fin.Connect.NRW is a network that brings together financial institutions and companies from the real economy and aims to open up new opportunities for transformation financing. The workshop on 24 August 2022 at the premises of the Institute of the German Economy served to highlight and discuss the opportunities, but also the remaining obstacles of the European capital market for transformation financing.
After a welcome by IW Managing Director Dr Hans-Peter Klös and the two representatives of the Ministry of Economic Affairs, Industry, Climate Protection and Energy of the State of North Rhine-Westphalia, Dr Schlotböller and Mr Plessentin, Dr Fritzi Köhler-Geib, Chief Economist of KfW Bankengruppe, led the first expert lecture. She first reported on the current economic environment and its significance for the transformation in Germany. Russia’s war against Ukraine, for example, is driving uncertainty among companies to a new high. Measured by an index of insecurity, it is currently significantly higher than during the Corona crisis and the debt crisis in the euro area. At the same time, however, the increased energy prices would once again highlight the need for transformation. Energy prices, along with food prices, are currently the biggest drivers of the inflation rate. At the same time, market participants expect a continuation of the interest rate turnaround by the European Central Bank. Their interim conclusion was that the transformation was more urgent than ever, but would have to gather momentum under unfavourable conditions.
Using data on the investment behaviour of companies, Dr Köhler-Geib showed that companies have invested too little in recent years. At the same time, the transformation requires very high investment volumes, 90 percent of which must be made by the private sector. However, according to Dr Köhler-Geib, one must also bear in mind that green markets are also growth markets. To improve the investment climate, companies therefore need reliable framework conditions and investment incentives. However, social acceptance of the transformation is also important. Politicians must also ensure that the competitiveness of companies is maintained and that the capital-diverting function of the financial markets functions smoothly. Her conclusion was therefore that a clever financing mix must be provided for the transformation to succeed.
The second expert presentation was given by Christoph Reissfelder from Covestro, a polymer manufacturer from NRW. Mr. Reissfelder emphasised that the circular economy has become the guiding principle of economic activity and that transformation also means moving from a linear to a circular economic model. He then explained Covestro’s climate strategy, which is based on three pillars. Scope 1 and Scope 2 emissions are to be reduced through sustainable production processes. The use of renewable energies addresses Scope 2 emissions, while climate-neutral process heat is intended to reduce Scope 1 and Scope 2 emissions. A greater challenge is the reduction of Scope 3 emissions. These are the emissions caused by primary products and the emissions from the company’s own products. According to Mr Reissfelder, investments in reducing one’s own emissions lead to higher operating costs in the first years, but in the medium term to lower ones. In his opinion, a great opportunity for companies is the high demand for sustainable products and the associated reputational gains for the company if it can offer green products. With new business fields, there is also a first-mover advantage, so that an early transformation of the company can definitely pay off. In addition, better financing conditions for sustainable companies can be expected, as the capital market already rewards sustainability.
In this context, Mr Reissfelder also emphasised the importance of ESG ratings for companies in order to signal sustainability to the capital market. The sustainability-linked bond and the use-of-proceeds green bond would be suitable financing instruments for sustainable companies, especially for large companies active on the capital market. In the case of the first financing instrument, the degree of sustainability of the company as a whole determines the financing costs, while in the case of the second financing instrument, the funds collected may only be used for sustainable projects within the company. While the sustainability-linked bond is mainly issued by already sustainable companies, the focus of the use-of-proceeds green bond is mainly on companies in the transformation process that invest in sustainability. Mr. Reissfelder emphasised, however, that for the issuance of such bonds, corresponding projects must be identified and bundled within the company, which requires a high degree of communication between the departments involved. It is therefore important that the sustainability department is located very high up in the hierarchy of the company.
The third presentation was given by Barkha Mehmedagic from Commerz Real. In her presentation, she presented a sustainability check tool for quantifying the sustainability level of real estate, with which investment properties can be compared in terms of their sustainability. Such a quantification of sustainability is important, on the one hand, to set up real estate funds sustainably and, on the other hand, to manage portfolios. In addition, clients can be better supported in the transformation to green real estate. For the financing of the transformation, however, she sees not only the financing of the refurbishment of properties, but also the securing of long-term follow-up financing for the transformed property after the sustainability goals have been achieved. Like the previous speaker, she emphasises that the transformation towards sustainability generates added value for the client.
In the second part of her presentation, Ms Mehmedagic talks about the financing of wind farms. Through a fund for small and medium-sized enterprises, she said, small and medium-sized enterprises are helped to gain access to green electricity production from wind farms. Through this, long-term electricity supply contracts can be made available to medium-sized companies, which was previously only possible for large companies. In addition, she pointed out that banks had become less risk-averse in financing renewable energies due to new remuneration structures and would finance significantly more of these projects.
In the subsequent panel discussion, these topics were explored in greater depth. The panel asked about the role of the green bond in financing the transformation, which was only used by companies that had previously been active on the capital market. However, this was very important for KfW’s financing, so that small and medium-sized enterprises could also indirectly benefit from the Green Bond instrument through the financing of promotional instruments, said Dr Köhler-Geib. Large companies would also benefit from the high demand for Green Bonds, said the other speakers. The role of the state as co-financier was also discussed. Many innovative investments are currently still too risky for bank financing. This is the case, for example, with carbon capture and storage. The speakers also noted that sustainable investments are easier to implement in the Scandinavian countries, which is why the transformation in these countries is somewhat more advanced. This illustrates the need for action and the necessity to further expand the financial ecosystem.