German climate action creates direct consequences for corporates

Joanne Harris

Ratings agency Standard & Poor’s (S&P) increased the credit rating of Germany’s national railway company Deutsche Bahn in mid-October, following the German parliament’s approval of the country’s first climate legislation aimed at reducing carbon emissions and hitting climate change targets ahead of a 2030 deadline.

The decision to increase the rating (from AA- to AA) was highlighted by S&P Global Rating’s senior credit analyst Beata Sperling-Tyler as ‘the first time that we have increased the credit rating of a large company because of climate action’ in Europe.

S&P’s move was a reaction to measures introduced in the German legislative package that will see investment in the rail network and a reduction in value-added tax on railway tickets. Germany is one of the first European Union Member States to pass legislation designed to meet a series of climate-related targets set by EU law, which follow the 2015 Paris Agreement on climate change.

Government decisions, hard fought by industry, will increasingly curtail corporate competition and consumer choices in an effort to achieve environmental outcomes, including those associated with climate change

Jonathan Cocker
Sustainability Initiatives Officer, IBA Environment, Health and Safety Law Committee

The rating agency’s decision means Deutsche Bahn will be able to access cheaper finance – but it also forms part of a global shift towards rewarding environmentally friendly strategies and recognising that there could be multiple benefits in the fight to prevent further climate chaos.

Jonathan Cocker, Sustainability Initiatives Officer for the IBA Environment, Health and Safety Law Committee and a partner at Baker McKenzie, believes there are at least two notable developments here. He explains that, firstly, the German climate change law expressly recognises that for tangible environmental benefits to be realised, the law must pick winners among competing technologies and activities. ‘The same is starting to happen under circular economy laws,’ he says.

‘Secondly, those regulatory choices will have direct consequences in the marketplace, including the example of Deutsche Bahn’s credit rating,’ adds Cocker. ‘Government decisions, hard fought by industry, will increasingly curtail corporate competition and consumer choices in an effort to achieve environmental outcomes, including those associated with climate change.’

Vanessa Havard-Williams, Global Head of Environment at Linklaters, says regulators and governments will want to keep under review the impact climate-led policy changes have on the financial markets to minimise the risk of ‘cliff edges or a green bubble’.

‘It will be interesting to see how the changes bed down over a sustained period, after 12 months or more. The energy transition will create winners and some organisations who are disadvantaged by these changes,’ says Havard-Williams.

Marc Ruttloff, counsel at Gleiss Lutz and an energy and environmental law specialist, points out that one sector in Germany that faces some challenges as well as opportunities due to the new climate law is the automotive industry. The industry is a huge contributor to the German economy. ‘Of course, they’re really working to address all the changes, to shift their business model and to develop the whole mindset of their companies accordingly. A lot of them are currently adapting their business models to follow the new road to electric driving,’ says Ruttloff.

He suggests that the transitions the economy, particularly the automotive sector, has to go through might have an additional impact on Germany’s ability to make the necessary changes. This is particularly as the package agreed in October is to be followed by the implementation of many more measures that will allow the government to monitor whether targets are being met.

Yet, as the S&P decision shows, there can be tangible advantages for corporates in industries likely to benefit from legislative change, or for those that make strategic decisions to boost their environmental credentials.

Cocker predicts a ‘battle of experts’, with companies increasingly looking for scientific verification of their products’ environmental credentials in order to gain an advantage over their competitors. He says third-party verification programmes could help companies distinguish themselves. ‘This remains very important as there is a common divide within industries between those, typically prominent, companies which are within the public eye and feel compelled to take steps to enhance environmental outcomes and those “free riders” who compete on price and avoid such investment,’ Cocker says.

‘A regulated market, under threat of commercial disadvantage for those non-compliant, remains the best method for achieving meaningful industry environmental outcomes,’ says Cocker. ‘The challenge is to impose those regulated outcomes while still promoting free market activities.’

Investors are also increasingly powerful, particularly in places where legislative action is yet to take place. ‘Investors recognise the importance of transition strategy for companies operating in carbon intensive sectors,’ explains Havard-Williams. She says both activist and mainstream investors around the world are looking for corporates to be able to articulate their environmental strategies, and seeking investments with defined environmental, social and green credentials.

That said, Ruttloff believes there is still some investor interest in high-carbon sectors. ‘High-carbon industries are a bold investment now but prices might go down which makes them more attractive,’ he points out, adding that even amid a shift to renewable energy, baseload capacity from oil and gas power is still required.

This shows that the regulatory and strategic shift towards greener financial markets is still in its infancy. While there is agreement that change is required, the pace of change is what is now concerning environmental experts. This are also worries that projects with a potentially positive social impact could be side-lined because they are not green enough.

‘Do we push climate at the expense of development and social impact?’ asks Havard-Williams. ‘The science directs this, but it poses real developmental and social challenges in some markets. And there’s a general risk that the market moves too quickly towards more straightforward green activities; there’s a pressing need to finance transition. Given where we started from, there’s an awful lot to do.’

Image: Frederick Hornung /