What Private Investors Need for the Green Transition

Effective climate policy in the real economy and an enabling regulatory framework for the financial sector

The ZEW economists published a policy brief to accompany the event in which they argue that the most promising ways for institutional investors to achieve a climate impact are through engagement and by integrating sustainability into investment decisions. To make securitisations a more attractive instrument for financing, they should be on a level regulatory playing field with other financial products with similar risks.

In her keynote speech, Karolin Kirschenmann emphasised the importance of a transparent and reliable regulatory framework: “The costs and benefits of sustainability reporting need to be carefully assessed in the coming years and the necessary adjustments must be made. Nevertheless, investors will need a phase of planning stability first. Then they will be ready to provide capital for long-term projects.” Kirschenmann also stressed that regulating the financial sector is no substitute for an effective climate policy in the real economy: “Pricing CO2 emissions, for example, tackles the climate impact of production in a targeted manner. The indirect approach via regulating the financial sector runs the risk that the intended effects are weakened and that they depend on the external funding required.”

Financial literacy and reliable information for private investors

According to the policy brief presented, the low proportion of sustainable investments among private investors is not due to a lack of environmental awareness but due to a lack of knowledge about sustainable financial products. In addition, there is a great deal of uncertainty about the financial performance of sustainable investment products. Tabea Bucher-Koenen explained: “It’s particularly important for private investors to strengthen their financial literacy, also with regard to sustainable investments. This will increase investments in the capital market and provide capital for the transformation.” The researchers emphasised that reliable and easily accessible information for private investors is key to more sustainable investments: “Our findings show that, on the one hand, retail investors tend to allocate more assets in sustainable funds if their sustainability is proven by ratings. On the other hand, diverging ESG ratings erode private investors’ trust in the meaningfulness of the ratings and this reduces sustainable investments.”Outlook: Action by private and public stakeholders required

Outlook: Action by private and public stakeholders required

In the panel discussion that followed, Alessandra Atripaldi, Deputy Head of the Capital Markets Unit at the DG Fisma of the European Commission, emphasised the importance of the Savings and Investments Union for mobilising private capital for projects that meet sustainability criteria. According to her, one task in this context will be to promote the necessary financial literacy among private investors and support the development of a culture of investing. Nathalie Larrousé, Head of the Green Capital Market Team at the European Bank for Reconstruction and Development (EBRD), added that particularly in less developed economies, capacity building with regard to sustainability both at the level of investors and in the real economy plays an important role. Caroline Le Meaux, Global Head of ESG Research, Engagement and Voting at Amundi, pointed out that a key challenge will be to reconcile short-term return requirements and long-term sustainability goals. The panellists all agreed that a joint effort is needed to achieve the climate targets and ensure Europe's competitiveness.