Study by the HCOB: The role of debt capital in greater sustainability

September 2021 – The path towards climate neutrality is clearly mapped out, but it is also long, and requires above all a lot of capital. Debt-financed sustainability projects, in particular, are few and far between. The study “Debt capital: Building Block of Sustainability” by Hamburg Commercial Bank now highlights ways in which that could change.

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The drumbeat from Karlsruhe could literally still be heard in Berlin’s government quarter. At the end of April this year the Federal Constitutional Court announced its ruling on a whole series of constitutional complaints against the German Climate Protection Act. To sum up: Germany must markedly increase its pressure in order to achieve its climate goals – particularly in the period up to 2030. The current Federal Government has heeded the warning from the supreme guardians of the law and promptly responded by revising the Climate Protection Act. The noble goal of climate neutrality is now envisaged for 2045 – five years sooner than the 2050 deadline agreed with the rest of the world in the Paris Climate Agreement.

“Through lending and capital investments, they can prompt those involved to intensify their efforts, most importantly in environmental and social affairs.”

Inka Klinger, Global Head of Infrastructure Project Finance at Hamburg Commercial Bank

No shortage of capital for climate transformation

But plans are first and foremost just plans. Making them a reality requires major technological change, as well as one thing above all else: the necessary capital. But there is no shortage of that in Germany and Europe. Germany’s insurance companies are the biggest in Europe, with more than ten trillion euros in assets under management. European banks in the Eurozone lend more than six trillion euros to households and five trillion euros to non-financial companies, while European asset managers within the Eurozone currently manage more than 14 trillion euros.

“Financial institutions in particular can and should play a major role in making the world a cleaner place,” says Inka Klinger, Global Head of Infrastructure Project Finance at Hamburg Commercial Bank. “Through lending and capital investments, they can prompt those involved to intensify their efforts, most importantly in environmental and social affairs,” says Klinger. At the same time, though, the path towards German and European climate neutrality by 2045 or 2050 is still a long one. Last year once again failed to set any milestones in this direction: German investments in renewable energies amounted to just eleven billion euros in 2020, while in 2010 the figure had been almost 28 billion euros.

“In contrast, there is clearly a willingness on the part of financial institutions – banks, insurers and pension funds – to play a role in achieving climate neutrality,” says Klinger. She bases this on a current survey by Zielke Research Consult, carried out on behalf of Hamburg Commercial Bank among 32 insurance companies, pension funds and asset management firms managing a total of more than one trillion euros in assets. “Particularly with the continually growing interest in investing in infrastructure among capital collection agencies such as insurance companies and pension funds – whether on the equity or the debt capital side – the importance of sustainability criteria and reporting on this is also growing,” adds Tilo Kraus, Head of Global Sales and Syndicate at HCOB.

“Debt-financed ESG projects are few and far between”

The institutions surveyed are placing greater emphasis on ESG-compliant investments. The abbreviation stands for investments that pay equal attention to environmental and social aspects as well as the fundamentals of good corporate management and a sustainable corporate strategy (“governance”). Increasing regulation and a growing awareness among customers are pushing banks and other players in the financial market ever further in this direction.

“Yet ESG projects that can be financed with debt specifically are few and far between,” says Thomas Miller, Executive Director Research at Hamburg Commercial Bank and one of the authors of the survey-based study “Debt Capital: Building Block of Sustainability.”

“With this study, we want to propose some ideas as to how we as financial institutions can make our portfolios even more sustainable. HCOB’s green book currently amounts to 4.5 billion euros, which is around 20 percent of our entire credit book,” says Inka Klinger.

Which sustainable debt capital instruments will play a role in your future investment decision-making?

sustainable debt capital instruments | Source: Zielke research consult

Source: Zielke research consult

With capital comes one thing above all: a lot of responsibility. Financial institutions need to know and influence the activities and the ESG strategy of their customers and their investments. “By measuring sustainability effects and taking them into account in investment decisions and lending, financial institutions will thus become multipliers for German and European sustainability strategies,” says Kraus.

As of October 1, 2020, sustainability aspects have been firmly integrated into the credit standards at Hamburg Commercial Bank and agreed as clear “guiding principles” for the bank’s own trading. In specific terms, the evaluation of ESG criteria for real estate financing, for example, might be as follows: With regard to environmental aspects, the bank will review the project’s energy consumption and assess the construction materials used and the emissions generated during the construction phase and operation. For the social dimension, the experts at HCOB are placing greater emphasis on adhering to occupational safety and social standards in the projects it finances. Corporate governance, meanwhile, is ultimately about ensuring that all statutory regulations are adhered to and that the business partners ideally have their own code of conduct.

Which assets have you invested in and will you invest in?

investition in green energy, graphik

Source: Zielke research consult

The study “Debt capital: Building Block of Sustainability” reveals what is currently a particularly strong willingness to invest in renewable energies. Investments in solar power and wind parks in Western Europe and North America play a notable role here. In future, many of the companies questioned also want to become active in the broadband sector and make use of green bonds. Preference is given to investments in “proven technologies”. The participants interviewed are currently steering clear of pioneering technologies such as hydrogen, but the HCOB is already working on making these kinds of projects financeable for debt capital investors in the near future.

In which of the following technologies can you see yourself investing over the next few years?

technic, graphik

Source: Zielke research consult

Inka Klinger

Global Head Infrastructure Project Finance

Phone: +49 40 3333-11343
Fax: +49 40 3333-611343
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