Responsible Investment Officer - ACTIAM
The SPD won the German parliamentary elections at the end of September. The centre-left party won 25.7 percent of the vote, just ahead of the CDU/CSU alliance. To obtain a majority coalition, the SPD depends on the cooperation of the two smaller parties, specifically the Greens, which came third at 14.8 percent of the votes, and the liberal Free Democrats (FDP), which at 11.5 percent of the votes is now the fourth biggest party. This has also created a clear divide on how to make Germany sustainable, a discussion that investors are following closely.
The election heralded the end of the Merkel era. In the 16 years of Angela Merkel’s reign, she was given many labels, one of which was the “Climate Chancellor”. The fact that she received it in the early years of her government was due in part to the enthusiasm she displayed as a young Environment Minister under Helmut Kohl in the 1990s. However, after taking office as Chancellor, Merkel largely chose to preserve the status quo by protecting traditional industries, such as the automobile sector.
This contributed to the rise of the Greens. "The next government must be a climate government," said Annalena Baerbock, the Greens party leader. She added that her party wanted "huge investments" in infrastructure aimed at greening and modernising the country. She favours a higher level of government intervention in the economy.
The FDP, on the other hand, believes that meeting climate targets has to be left to the free market. "The election results have made one thing clear," said Volker Wissing, the party’s general secretary. "Citizens do not want climate protection at the expense of prosperity," referring to various factors such as the German pension system, which is under pressure due to an aging population.
“Germany could save money by immediately investing in making the country more climate-proof rather than constantly spending vast sums to remedy the effects of climate change.”
According to research by the think tank Agora Energiewende, the German state will have to triple its planned investments in climate protection to meet its 2030 climate targets. Those investments are needed because, although Germany is the European leader in reducing the energy sector’s CO2 footprint, other sectors are actually lagging far behind in terms of sustainability. For example, the CO2 footprint of German industry has grown steadily since 2012. The main limiting factor is the capacity of the electricity grid, which needs to be expanded to supply major customers with sustainably generated electricity.
At the same time, the cost of doing nothing could vastly exceed the envisaged investments. For example, the flood disaster in West Germany, which accounted for over 180 deaths, will cost €30 billion in reconstruction aid alone. In short, Germany could save money by, for example, immediately investing in making the country more climate-proof rather than constantly spending vast sums to remedy the effects of climate change. The question is, therefore, to what extent are the two sides of the divide having the right discussion by viewing sustainability and pension accrual as mutually exclusive realities?
Furthermore, would the investments that are now needed really erode the German pension system, a situation that the FDP wants to avoid? How should a portfolio manager anticipate the impact of these looming policy choices