Frankfurt The DZ Bank and the energy group EnBW see great dangers from new sustainability rules in the financial sector. “The current regulation creates false incentives,” warns DZ-Bank co-head Cornelius Riese in a double interview with EnBW CFO Thomas Kusterer.
If the financial institutions would only finance green companies and projects in the future, 95 percent of German companies would have a problem, said Riese. At EnBW, no banks have said goodbye, said CFO Kusterer. “But in the future there will be a risk that cannot be dismissed out of hand.”
Should the banks withdraw from EnBW, Kusterer fears higher financing costs. “We would then earn less and therefore have fewer opportunities to invest,” he said. “The expansion of renewable energies would then probably proceed more slowly, and that would not be in the interest of the climate and our society.”
Mr. Riese, Mr. Kusterer, we want to talk about financing the restructuring of the economy towards more sustainability, ESG for short. Will this succeed under the current framework conditions?
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Cornelius Riese: The transformation of one of the largest industrial locations in the world is a daunting task. The financial sector plays an important role in this. Reliable framework conditions are crucial for us here. However, the sustainability regulations for the financial market also entail risks, for example by classifying investments as “green” or “bad”.
To what extent is that a risk?
Giant: Financing companies that are not yet deep green and want to become more sustainable is the key lever towards a carbon-neutral economy. EnBW is an example of this. While the company still operates coal and gas-fired power plants, it has a clear exit path. At the same time, major investments are pending that will immediately reduce CO2 and expand renewable energies.
Thomas Kusterer: So far none of our banks have withdrawn. But this risk will exist in the future and cannot be dismissed out of hand. That would be a very serious issue for us, because we want to invest around twelve billion euros net in the conversion of the energy landscape by 2025: in the expansion of renewable energies, the network infrastructure, e-mobility and the construction of new gas-fired power plants. In the future, we want to convert these to hydrogen and operate them CO2-free.
Where do your worries come from? Gas-fired power plants should be classified as sustainable under the EU taxonomy – even if environmentalists find that dubious.
Kusterer: We welcome the fact that the Commission has made at least a few improvements to the criteria for natural gas, in particular the deletion of the blending requirements from 2026. But this will not be enough. For example, the CO2 emissions per kilowatt hour may remain at a maximum of 270 grams. But even the most modern gas-fired power plants cannot do that today. This means that the qualification of the majority of the investments required for the energy transition in Germany is still de facto ruled out.
EnBW wants to shut down its last nuclear power plant by the end of 2022, although nuclear power is classified as sustainable in the EU taxonomy. “The topic is over for us,” says CFO Thomas Kusterer.
(Photo: dpa)
What will happen to the financing of energy companies such as EnBW if the current set of rules is retained?
Riese: The current regulation creates false incentives. A possible and extreme way to a climate-neutral portfolio would be if all banks only finance green companies and projects within a few months. But then 95 percent of German companies have a problem. That would help the climate the least. Then the industry either migrates to other regions with lower environmental regulations, or it depends on the financing of hedge funds, oligarchs and other actors in the unregulated area. However, we should and want to support companies in their transformation.
Mr. Kusterer, have you already considered alternative financing options such as hedge funds if banks will no longer finance you in the future?
Kusterer: We don’t hope it comes to that, because that would ultimately not be good for the energy transition. A smaller group of investors would inevitably have an impact on our cost of capital. Our entire corporate financing would become more expensive. This would not only affect new gas-fired power plants, into which only a fraction of our investments go, but also the expansion of the network infrastructure and renewable energies. Nobody would have any of that.
How would EnBW react if this happened? Would the group then have to split like Eon into a part that focuses on renewable energies and another part for gas and coal-fired power plants?
Kusterer: Splitting up is not an issue for us. But of course we would have to react to the higher financing costs. We would then earn less and would therefore also have fewer opportunities to invest, because we finance ourselves not only through banks, but also through our own cash flow. The expansion of renewable energies would then probably proceed more slowly, and that would not be in the interest of the climate and our society.
Nuclear power is classified as sustainable in the EU taxonomy. Do you shed a tear for your nuclear power plants?
Kusterer: No, the topic is over for us. We decided to phase out nuclear power in 2011 and will shut down our last nuclear power plant at the end of 2022.
Riese: There is a misconception at this point in the EU taxonomy. In my view, nuclear and gas are not green, but we need gas-fired power plants in Germany for a transitional period. In this respect, the decisive question is what is appropriate for the transformation. At the moment, gas works are still that way – which is why they have to remain financially viable.
In Germany, there is a discussion about bringing forward the coal phase-out currently planned for 2038. Is EnBW ready for this?
Kusterer: We are currently planning to shut down our last hard coal-fired power plant in 2032. But we would be technically able and ready to phase out as early as 2030. However, the right framework conditions must be created for this – above all the faster expansion of renewable energies, which would then have to cover 80 percent of the energy requirement, and the construction of new gas-fired power plants, otherwise the security of supply would no longer be guaranteed not only, but especially in southern Germany.
Organizations like Urgewald not only demand that EnBW should get out faster, but also complain that the group does not distance itself from “dubious coal suppliers” like Drummond and Glencore.
Kusterer: We are absolutely transparent about where we get our coal from, and we know that coal production has been criticized in some countries. We do everything we can to ensure a supply that is as compliant with ESG criteria as possible.
In the talks with you, is DZ Bank putting pressure on EnBW to phase out coal sooner? After all, other suppliers like Enel or Vattenfall can do the same.
Kusterer: These suppliers have a completely different energy mix from the outset, so comparisons here make little sense. Basically, we talk to all banks about what is a realistic timeframe for a coal phase-out. But what should the banks do? You can’t change the general conditions in Germany.
>> Read here: The EU Commission classifies nuclear power and natural gas as sustainable
DZ Bank could charge you higher interest rates or end the business relationship entirely. After all, it is not dependent on EnBW as a customer.
Riese: There is a democratically negotiated way of changing the energy mix in Germany over the next few years. If energy producers like EnBW stick to this path in a measurable way and report on it transparently, I see no reason for us banks to say: we will no longer finance you. Especially since even the conditions of the syndicated loan with the banks are transparently linked to sustainability indicators. We want to continue to support EnBW and other companies that are undergoing transformation, even if we face some headwind here and there.
Has DZ Bank already parted with corporate customers who do not credibly align themselves with ESG criteria?
Riese: Yes, we have also reduced some commitments. We have exclusion criteria, for example we do not finance any new coal projects, and we also expect a credible transformation path from our customers. But we act towards our customers as advisors and companions – and not as police officers. Our exposure to coal-fired power is generally very small. It accounts for less than one percent of our total loan portfolio.
In the future, banks will have to show what is known as a “green asset ratio”, which is intended to show how sustainable their loan portfolio is. What do you make of it?
Giant: Is a bank that has a 100 percent Green Asset Ratio because it only funds Tesla the best? We don’t think so, because Tesla finds enough investors anyway. An institute with a green asset ratio of five percent, which accompanies many customers in their transformation, could be much more important for the sustainable restructuring of the economy. As of now, the Green Asset Ratio will not be very meaningful. We should talk more about effectiveness and practicality and less about moral categories like “green” or “not green”.
The ECB’s first climate stress test is due soon. What are your expectations?
Riese: The stress test simulates how our loan portfolio will develop in various climate scenarios – for example, if the average global temperature rises by around three degrees. If you have financed real estate in regions that are below sea level, you have to simulate higher depreciation there for 2035, for example. I think it’s right that we deal with such topics. But the gain in knowledge and the steering effect will be manageable on the first run.
How do you rate the way regulators deal with the topic of sustainability in general?
Riese: ESG is also a qualitative and long-term issue. However, the regulator approaches this quantitatively and granularly, as we know it from capital and liquidity management. This leads to complex requirements, which then end up with corporate customers via the banks. As a large company, EnBW can meet these data requirements, but many small and medium-sized companies cannot. If we do not shape banking regulation in a smart and pragmatic manner, there is a risk of undesirable side effects.
What effects would that be?
Riese: If the demands on companies in Europe are unattainable, there will be relocations – for example in the basic materials or cement industry. The cement will then no longer be produced in the most efficient cement power plants in the world in Germany, but less sustainably in China. And from there it is transported back to Germany by ship. We absolutely must avoid that.
Mr. Riese, Mr. Kusterer, thank you very much for the interview.
More: Three degrees of global warming, price jump in CO2 emissions, heat waves: ECB climate stress test starts