Sustainability – an opportunity for Germany’s Mittelstand Speech delivered at the Munich Transition for Tomorrow Summit
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1 Introduction
Ladies and gentlemen,
The overarching idea behind today’s conference is as topical as its timing:
How will Germany – how will you – transition successfully into a digital and sustainable future?
All eyes are currently on the incoming Federal Government. They are the ones who must lay the foundation for innovation and change. However, we must all play our parts in making the transition a success.
Many of you – both here in person and watching remotely – are representatives of Mittelstand companies. You have pivotal roles to play in all of this. You have always been a dependable source of innovation and growth in our country. You are proof that sustainability and commercial success can go hand in hand.
2 Main section
Ladies and gentlemen,
Germany is facing structural change of historic proportions. It is of vital importance that Mittelstand businesses play their part in the environmental and digital transformation. I’m not talking about changing overnight. It’s more a matter of the economy as a whole becoming more digitalised and climate-neutral over the coming years.
Businesses need time. Ladies and gentlemen, you need time. But, at the same time, we’re running out of time.
After all, it’s up to us to leave the environment and the economy in a state that’s fit for future generations.
This means achieving climate neutrality by 2045, which is a goal that’s certainly within our grasp. But what does that call for?
In my view, there are three fundamental prerequisites:
- the courage to embrace change;
- an innovative mindset; and
- funding to make the transformation and the innovations a reality.
Let’s take a look at the innovations.
When it comes to being inventive, Germany ranks among the world leaders in many disciplines. Indeed, there are some fields where Germany is at the global forefront, such as in the number of patent filings.[1] Europe is home to roughly 42% of AI start-ups worldwide.[2] That’s a testament to your innovative prowess.
In the future, we’re certain to see more cooperative ventures between industry stalwarts and up-and-coming start-ups, be they tech start-ups or specialised GreenTech firms. Not just that: DataTech enterprises and what are known as RegTech firms – businesses that offer solutions for regulatory challenges – are growing in importance, too.
And there will also need to be more collaboration between businesses and academia.
Costs
Needless to say, someone is going to have to foot the bill for the transition. So let’s now turn our attention to the costs. Innovations and change involve risks and significant costs.
Germany will need to invest considerable sums of money to fund the environmental transformation, with one recent estimate putting the price at around €240 billion each year until 2045. Of that figure, €40 billion each year would be additional investment.[3]
That’s a lot of money. The public sector cannot shoulder these investments alone. Businesses themselves will need to mobilise large amounts of capital to future-proof their operations.
Funding the transformation
The question is, where will firms get the money they need to fund the transformation?
In Germany, banks play a key role in funding investment. At the same time, though, there is only so much risk banks can bear when it comes to financing their business partners. Banking supervisors are increasingly turning their attention to the climate-related risks on financial institutions’ balance sheets. In future, then, banks are going to take an even closer look at the climate risks to which their corporate clients are exposed.
There are two types of climate-related risk involved here. First, the firms or projects that need funding may be subject to physical risks in the form of natural disasters. So the question here is: how probable are floods, droughts, heatwaves, wildfires or similar events?
Second, banks also need to cast an eye over their customers’ transition risks. How well is a firm equipped to face new legislative requirements or swift political decisions that might be adopted in the interests of combating climate change?
Evidently, it is crucial for medium-sized enterprises, too, to recognise and reduce their own climate risk. This is because financial institutions are going to look even more closely at how sustainably their business customers operate.
Even today, shortcomings in sustainability and a lack of transparency can have a bearing on the granting of loans.
Role of the capital market
Let’s now take a look at how capital markets and venture capital fit into this.
Developing fresh ideas, upscaling them and getting them ready for the market are tasks that increasingly call for investors with an appetite for risk. It would be wrong to understate the roles that capital markets and venture capital can play here.
Capital markets in the United States and Asia are a much more plentiful source of investment capital than those here in Germany. German Mittelstand companies have not yet warmed to the capital market. In light of the fundamental process of transformation that is currently taking place, the time has come to reassess the funding mix.
Equity finance
Any reassessment of the funding mix should also take consideration of the role played by equity finance. Equity finance seems to be more conducive to supporting the transformation, as suggested by the findings from a study carried out by the European Central Bank.[4]
That analysis suggests that the carbon footprint of an economy shrinks faster in economies that receive relatively more of their funding from equity investors than from banks.
Zukunftsfonds - Futur Fund
On this note, I would also like to mention the German Zukunftsfonds, which was set up in Berlin during the last legislative period[4]. As a venture capital fund investing in future technologies, the Zukunftsfonds aims to use public funds to mobilise private investment.
The Zukunftsfonds is a good first step in the right direction. Now it’s a question of making the fund both more attractive and more comprehensive.
3 Conclusion
Ladies and gentlemen,
Allow me to wrap up. Change is both an opportunity and a risk. So let’s take the transformation as an opportunity. And let’s leverage all the innovative potential we can muster.
The private sector, together with the public sector, bears a great responsibility for ensuring that our country is fit for the future. A Mittelstand that embraces the transition towards digitalisation and sustainability will endure as the backbone of the German economy.
Footnotes:
- World Intellectual Property Organization (WIPO), Global Innovation Index 2021, September 2021 (Global Innovation Index 2021: Which are the most innovative countries? (wipo.int)).
- German Mechanical Engineering Industry Association, Success factor AI – machine builders and startups find each other (Success factor AI - machine builders and startups find each other - vdma.org - VDMA).
- McKinsey, Net-Zero Deutschland, September 2021 (https://www.mckinsey.de/business-functions/sustainability/our-insights/net-zero-germany-chances-and-challenges-on-the-path-to-climate-neutrality-by-2045)
- Popov, Alexander, Does financial structure affect the carbon footprint of the economy? in: Financial Integration and Structure in the Euro Area, ECB, March 2020 (Financial Integration and Structure in the Euro Area, March 2020 (https://www.ecb.europa.eu/pub/fie/html/ecb.fie202003~197074785e.en.html#toc8))