Decarbonisation poses enormous challenges for the German economy, but also offers great opportunities. This is the conclusion of the study ‘Germany as an industrial location in times of decarbonisation’. The study was conducted by the German Economic Institute (IW) on behalf of the Ministry of Economic Affairs, Industry, Climate Protection and Energy of the State of North Rhine-Westphalia in partnership with Germany Finance.
The current decarbonisation situation was analysed and the resulting areas of action for politicians and companies. One particularly important aspect is the role of the financial sector in the transformation towards climate neutrality.
The study makes it clear that decarbonisation requires considerable investment. In Germany alone, around 220 billion euros will be needed each year to achieve the climate targets. The financial sector is indispensable for financing these enormous sums. Banks and capital markets can provide the necessary funds to support companies in the transition to climate-friendly technologies.
Germany's financial sector offers the best conditions
The good news is that the German financial sector is well positioned to master this challenge. Banks have solid balance sheets and a low volume of non-performing loans — especially in comparison to direct competitors within the EU. In France, the figure is twice as high at 2.2 % and in Italy it is three times as high at 3.3 %. Insurance companies are also important investors on the bond markets and can therefore support the financing of transformation projects.
Nevertheless, there are some challenges in which the financial sector can play a decisive role:
- Financing gaps for start-ups: The study shows that there is a lack of venture capital and strategic investors in Germany for start-ups that develop innovative solutions for decarbonisation. Strengthening IPOs would be helpful here. While market capitalisation in Germany is less than 50% of gross domestic product, it is more than 80% in France and almost 160% in the USA.
- Risk assessment of transformation projects: Investments in green technologies are often associated with higher risks, which can make financing more difficult. Innovative financing instruments such as green bonds, transformation funds and amortisation accounts are needed to mitigate these risks.
- Lack of standardisation of infrastructure projects: Regional infrastructure projects are frequently too small and individualised to be attractive to investors. By creating larger, standardised projects, investments in regional infrastructure can be made more attractive to investors.
- Promotion of sustainable financial products: Green bonds and ESG-compliant investment funds are already available Banks and insurance companies should increasingly offer sustainable financial products such as green bonds and ESG-compliant investment funds.
Decarbonisation as an opportunity for the financial sector
Decarbonisation is an opportunity for the German financial sector to strengthen its role as a driver of innovation and secure the future viability of the German economy. The transformation to a climate-neutral economy can succeed if policymakers, companies and the financial sector work together.
Jürgen Schnitzmeier, spokesperson for Germany Finance, comments: “The transformation of the financial and real economy is already in full swing. Digitalisation and decarbonisation are not only triggering major investment and financing requirements. They are forcing banks, the credit industry and companies to disruptively adapt their products, processes and business models. The financial sector has a key role to play here. Liability exemptions and guarantees can help to facilitate the financing of important transformation projects.”
The study by the German Economic Institute provides a much more detailed look at the connection between decarbonisation in Germany as an industrial location and the financial market. You can find the download directly below this article (only available in German).
