The working group comprises PGGM, NIBC, ING, TKP Investments, Delta Lloyd, MN, Aegon and the AFM, and is chaired by DNB. It examined whether government policy, supervision and financial regulations are regarded as an impediment to investments, in an effort to find out why the mobilisation of sustainable finance is lagging. The transition to a sustainable economy in the Netherlands demands significant investments. According to a study by McKinsey consultancy (2017), the Netherlands will have to make estimated additional investments of up to EUR 10 billion in order to reach the 2040 Paris Climate Agreement goals. This does not even include investments in other sustainability areas such as biodiversity and the circular economy. The financial sector plays a key role in mobilising such investments.
Supervision is not an impediment
In its final report, the working group concludes that regulatory requirements and supervision are not an impediment to sustainable finance. The main reason why insufficient sustainable investments are being made is that investors too often find the risk/return profile of these investments insufficiently attractive. The sustainable finance market is a young market, mainly involving innovative technologies that have not yet proven their worth and new companies without a track record. Accordingly, the risks associated with these investments can be high, the returns can be low, or a combination of the two.
Higher capital requirements
High-risk investments are subject to higher capital requirements, and this is also true for high-risk sustainable investments. Moreover, part of sustainable investments is made in non-listed companies. Such investments are subject to higher liquidity requirements, since they are relatively illiquid. Some institutions believe these higher capital and liquidity requirements are hampering them, but according to the working group this does not qualify as a reason to abandon the principle of 'more risk, more capital'. However, promoting sustainable investments through more lenient capital requirements could lead to institutions being unable to absorb any losses on these investments.
It remains to be seen whether the risks of sustainable and non-sustainable finance are sufficiently clear at this moment in time. Most risk estimation models are retrospective in nature and do not take the consequences of climate change into account. In the energy transition, the business model of CO2-intensive companies could come under pressure, with expected returns being overestimated and risks being underestimated. Financial institutions and supervisors should therefore include sustainability risks in their risk analyses more than they do now. This requires better knowledge of the theme, both on the part of the financial sector and of the supervisory authorities.
An additional question that some institutions raised is whether the current valuation methods for companies are appropriate. Some institutions see market value as an obstacle, as they believe it insufficiently reflects long-term developments like the energy transition. Others, including DNB, do not regard market value as an issue. Given the current availability level of information, they believe it is an accurate reflection of the situation. The markets are perfectly capable of integrating market operators' expectations on long-term developments in today's market value.
Financial institutions consider the lack of consistent, long-term and detailed sustainability policies developed by the government to be one of the main reasons why sustainable investments are not sufficiently attractive. An inconsistent sustainability course creates uncertainty in the market and hampers investments. Institutions are perceiving government policies in the area of energy transition to be increasingly well-defined, particularly in the Netherlands. The upcoming climate act and climate agreement are clear examples of this. At the same time, the working group sees room for improvement in further developing policies in the areas of biodiversity and the circular economy.
Sustainable Finance Platform
The Sustainable Finance Platform partners welcome the working group's conclusions. The Platform is a cooperative venture of the Dutch Association of Insurers, the Federation of the Dutch Pension Funds, the Dutch Fund and Asset Management Association, the Dutch Banking Association, the Ministry of Finance, the Ministry of Economic Affairs and Climate Policy, the Sustainable Finance Lab, the Dutch Authority for the Financial Markets and De Nederlandsche Bank. Its ambition is to promote and increase awareness of sustainable funding in the financial sector.