Sabine Mauderer: Walking the talk - transition plans as catalysts for
the net-zero transition
Speech by Dr Sabine Mauderer, Member of the Executive Board of the Deutsche
Bundesbank, at the 9th Green Finance Forum "Changing or pretending - between
ambition and reality", Euro Finance Week, Frankfurt am Main, 14 November 2023.
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1 Looking back and moving forward
Ladies and gentlemen,
Who here still remembers the 1970s? Probably not too many of you.
Let us wind back the clock fifty years. What can we see? First, we see a war in the
Middle East and surging energy prices. Second, as a result, we see decision-makers
debating measures to reduce energy costs and to increase energy efficiency. Think
about the car-free Sundays in Germany, for instance. Third, we see a global economy
facing weak growth and high inflation.
Fifty years later, we are in a different setting but it might be helpful to take into account
some of the lessons learned back then. The horrific attacks by Hamas on Israel on 7
October have sparked a new escalation of violence in the Middle East. The conflict is
1
adding to economic uncertainty at a time when the global economy "is limping along" -
to use the words of the IMF - and inflation has not yet been completely defeated.
In particular, the flare-up of violence poses renewed risks to energy prices. This comes
just a year and a half after Russia's invasion of Ukraine sent global energy prices
soaring. These events, like those of 1973, highlight just how vulnerable Western
economies are to swings in energy markets because of their heavy dependence on
fossil fuels.
There are two important levers we can use to reduce this vulnerability. First, we ought
to increase energy efficiency - so we can get more bang for our Watts. Second, we
need to ramp up our use of renewable energy to lower the carbon intensity of the
energy we consume.
Experience gained fifty years ago offers valuable lessons. Back then, German
companies faced strong economic headwinds, too. Amid these challenges, they proved
their innovative strength and their ability to adapt their business models to the changing
conditions. High energy prices prompted substantial efficiency improvements and
research into alternatives to fossil fuels.
Of course, history is not repeating itself - there are important differences between the
1970s and now. Today, German firms and other European corporates have understood
that they need to wean themselves off fossil fuels. This transformation will reduce
dependency on fossil fuels. It will mitigate the financial risk of rising energy prices.
I am optimistic that European companies will use their innovative strength to adjust their
business models.
Today's topic is "Changing or pretending - between ambition and reality". It is difficult
for the real economy and the financial sector to show proof of real change. One tool that
can help corporates to show this proof is corporate transition plans. Corporates set out
transition plans to explain their transformation strategy. They publish their strategy for
the next 5, 10 or 15 years. Not just in prose but with facts and clear figures, so that
investors will see whether a corporate is about to change or just pretending.
2 Well begun is half done - benefits of transition plans
Ladies and gentlemen,
Many companies have pledged to achieve net-zero emissions by 2050. But as the
motto of this conference suggests, ambition and reality do not necessarily match up.
I know this from personal experience, so allow me to stray for a moment. New Year is
approaching fast, so I want to share my New Year's resolution with you. I want to brush
up on my French skills.
I know that without a rigorous action plan my resolution might be shelved before I even
pick up the first French book. But there's a huge difference between New Year's
resolutions and net-zero pledges.
Not sticking to a New Year's resolution is not the end of the world. Missing climate
targets has far greater consequences. Good forward planning is essential.
To turn ambition into reality, companies need a concrete, medium to longer-term action
plan. In other words, they need a transition plan that outlines clear milestones and
intermediate targets. Transition plans are the chance to break the tragedy of the horizon
by aligning long-term commitments with concrete action today.
A clear roadmap will make it easier for companies to manage risks that will come with
the transition. And it will help them to seize the opportunities presented by the
transition. Because rethinking business models can open up the potential for more
efficient processes, new products, and new markets.
Transition plans also provide valuable signals to stakeholders when it comes to
securing financing. Banks and other financial stakeholders are increasingly scrutinising
their corporate clients' transition strategies. They want to see more than just lofty
targets and pledges, and demand concrete steps. This is especially relevant for
companies that are not green yet or those that might never become fully green.
Earlier this year, the Bundesbank asked German banks about the impact of climate
change on bank lending. Banks reported that they had tightened credit standards for
carbon-intensive companies more than for green and transitioning companies over the
past 12 months. In addition, banks said that over the next 12 months they were
planning to tighten their credit standards even more sharply in connection with the
impact of climate change.2
This goes to show that companies that cannot credibly set out a path to a low-carbon
business model might struggle to access financing in the future. Transition plans
function as a market instrument that can help to channel financing to companies that
have made a credible commitment to achieving climate targets.
3 Too many cooks spoil the broth - a case for consistent standards
The benefits of transition plans are clear. Actually writing them is less straightforward.
Existing transition plans differ greatly in terms of length, format and content. I have seen
some that are 100 pages long. And I have seen others that are a much shorter read.
There are multiple competing market standards. Each of them aim to bring greater
clarity. While laudable, the multitude of varying frameworks might, in fact, have made it
less clear what a good transition plan should entail.
I believe the clarity that corporates and financial institutions need has to come from the
public sector. The Network for Greening the Financial System (NGFS) - a global
coalition of central banks and supervisors that I will have the privilege of chairing
starting in January - is engaging with financial institutions around the world. We aim to
find out if financial institutions are currently getting the data they need from their
corporate clients' transition plans.
In a perfect world, the answer would be yes, but we expect to find data gaps. Good data
is key and closing data gaps is crucial. By identifying these gaps, the NGFS can help to
improve the informative value of transition plans.
Regulators have also been busy bringing some order into the diverse transition plan
landscape. For instance, many EU and non-EU companies will soon have to disclose
transition plans under the Corporate Sustainability Reporting Directive (CSRD). The
EU's framework has the potential to become an international reference point.
Having these international reference points is absolutely critical.
I want to stress one thing: we must not replace competing market standards with
competing regulation. Ideally, by disclosing one transition plan, companies can comply
with regulatory requirements in multiple jurisdictions. And ideally, this one transition
plan would provide banks and investors with the information they need.
To achieve this optimal scenario, regulatory coordination is vital.
Regulations need to build on one another. The aim must be to achieve international
compatibility and interoperability of standards.
That way transition plans can unfold their full potential. As a strategic guidance tool.
And as a tool to channel financing to companies that are committed to decarbonising.
4 Conclusion
Ladies and gentlemen,
Today, we are at a crossroads once again. There is no doubt that we are navigating
through challenging times. But "in the midst of every crisis, lies great opportunity."
Those aren't my words, but Albert Einstein's. I find them quite fitting.
Experience gained over the past two years gives us plenty of reasons to double down
on transition efforts and fast-track the low-carbon energy transition. Net-zero
commitments are a vital step, but not enough. Talk is cheap. What matters is walking
the talk!
1
International Monetary Fund: World Economic Outlook: Navigating Global
Divergences, October 2023.
2
Deutsche Bundesbank: Bank Lending Survey, July 2023.