ESG: German municipalities need to catch up
In the capital markets, a new megatrend, ESG, has finally taken hold with the support of politics: The focus on sustainability is becoming increasingly important for capital providers – and thus also for local authorities in Germany. It is true that they have recognised the growing importance of sustainability. “However, there is still some catching up to do in terms of implementation,” says Sebastian Bergmann, Managing Director of European Debt Solutions GmbH (EDS).
There is growing pressure among lenders to make their lending sustainable. For 29 per cent of them, ESG issues are “very relevant” today, compared to only eleven per cent of municipal capital borrowers. This is the result of a study by the Fresenius University of Applied Sciences. Both investors and borrowers expect ESG to grow in importance over the next five to ten years, but the increase is significantly greater among investors.
Only one-third of the municipal capital borrowers surveyed said they were actively involved in the area of sustainability. Among the capital providers, on the other hand, 74 percent take up the topic of ESG in their institution. 71 percent publish a regular sustainability report. Almost all would welcome a duty for an ESG and sustainability report for municipal utilities, 90 percent a reporting duty for municipalities. The vast majority of borrowers, however, view such a duty with scepticism.
The wish list of lenders also includes certification through ESG ratings by independent third parties as well as more transparency in the earmarking of a loan on the part of borrowers. From the perspective of municipalities and municipal enterprises, however, the time and costs involved are often too high and the advantage in terms and conditions too low. “Overall, there is a conflict of interest between the two sides that should be remedied through increased information and cooperation,” says Bergmann.
The study also examined the 20 most indebted municipalities for their ESG compliance. The result: of the 17 UN Sustainable Development Goals (SDGs), only two are not addressed by the municipalities: SDG 13 (climate protection measures) and SDG 17 (global partnership to achieve the goals). In a second step, the extent to which the municipalities comply with a further nine ESG criteria – from greenhouse gas emissions to the promotion of mobility goals and gender issues – was examined.
to gender diversity, education, migration, corruption prevention and data protection.
Four of the nine criteria are met by all municipalities: Disclosure of Greenhouse Emissions, People with Disabilities and Seniors, Education, Health, Safety and Order, and Ensuring Data Protection. For the criteria on mobility/smart city and migration and integration, the rate is at least 95 percent.
The weak point remains the maintenance of a public corporate governance code. At 60 percent, this is the criterion least fulfilled by municipalities, followed by gender diversity (65 percent). The focus here is predominantly on gender equality, not gender diversity. When it comes to preventing and combating corruption, municipalities achieve a score of 75 percent.
“The orientation towards ESG criteria is gaining in importance for investors, which is why the municipalities must pay more attention to this topic,” summarises EDS Managing Director Bergmann. In particular, transparency in the earmarking of loans received must be strengthened. In addition, there is a need to catch up on corporate governance – keyword Public Corporate Governance Code – as well as on corruption risks and the education about and promotion of gender-independent opportunities. “Finally, municipalities have a special role to play in defining, introducing and implementing ESG standards,” says Bergmann.