Sustainable finance: smaller is best in German bid to hit green targets
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Michael Brodmann, the owner and chief executive of German mineral water company Stiftsquelle, loves to spend money to make his company greener — even if projects such as the annual fuel efficiency training for the group’s truck drivers do not pay for themselves.
“Since my days as a teenager, I have been fascinated by reducing the use of resources,” says the 57-year-old in the company’s headquarters in Dorsten on the northern edge of the Ruhr, Germany’s densely populated industrial heartland.
Here, the radiators run on waste heat generated by the compressors on the workfloor. The computers, meanwhile, use electricity from a vast solar panel on the roof and the delivery trucks are washed with rainwater.
“We started to think about sustainability in the mid-1980s, long before the term was invented,” says Mr Brodmann. Each year, he earmarks about one per cent of Stiftsquelle’s annual revenue, which he puts at €17m, for green investments.
But even in Germany, where renewable sources account for 40 per cent of electricity output and opinion polls put the Greens as the second strongest party, environmentally obsessed entrepreneurs such as Mr Brodmann are the exception rather than the rule.
“The typical businessman who owns a small or medium-sized enterprise does not invest in energy efficiency for its own sake,” says Jochen Oberlack, a green finance expert at DZ Bank, Germany’s second-largest lender. Coping with digitalisation and managing a skills shortage are more pressing concerns.
Moreover, energy prices over the past decade rose less sharply than many observers expected. “This makes it more of a challenge to convince small and medium enterprises to invest in energy efficiency,” says Mr Oberlack.
Yet without the help of Germany’s famed Mittelstand — small to medium-sized businesses that provide 70 per cent of the country’s jobs and 90 per cent of its apprenticeships — Europe’s largest economy will not meet its commitment to lower carbon emissions by 55 per cent by 2030, relative to 1990.
The corporate sector accounts for 44 per cent of Germany’s annual energy demand, with private households and transport making up the remainder. This is why the German government is throwing a lot of money at the problem. Thanks to subsidised financing and redemption grants, companies can normally expect that investments in increased energy efficiency break even within two to five years and earn a return on capital of at least 20 per cent, says Mr Oberlack.
Most of the subsidised lending is forked out via state-owned development bank KfW, which was founded in 1948 to administer Marshall Plan funds.
According to the most recent data available, 43 per cent of KfW’s €76.5bn in annual lending is linked to climate and environmental protection. About half of all wind farms and solar parks in Germany involve KfW loans.
The bank is offering 12 loan schemes for companies that invest in energy-efficient buildings, greener production technologies and the re-use of waste heat.
“We are promoting areas where we have the impression that there is market failure,” says Ingrid Hengster, KfW executive board member, adding that the bank also tries to push infant technologies such as battery storage systems for energy from renewable sources.
Within Germany’s banking system, KfW plays a particular role. It has no branches, does not collect deposits and does not lend directly to companies. It works in tandem with for-profit banks, which funnel KfW funds to the corporate sector.
Those for-profit banks take the individual lending decision and are exposed to the credit risk. KfW in return offers them cheaper refinancing funds. The for-profit banks earn an undisclosed fee from the state-owned lender. “We are the partner for the banks on the ground,” says Ms Hengster, stressing that KfW is not crowding out commercial banks.
DZ Bank’s Mr Oberlack is full of praise for the model and calls KfW his “prime business partner”.
For corporate clients, KfW loans are normally 25 to 50 basis points cheaper than standard ones. For certain projects, the German government shoulders 5 to 20 per cent of the loan repayments.
A flagship programme for using industrial waste heat in Hamburg has relied heavily on such lavish subsidies. Since October, a newly built urban district has been heated with carbon-free waste heat generated by copper-maker Aurubis based in the north German city. This avoids the emission of 20,000 tons of carbon dioxide per year.
Aurubis invested €20m in the project, which it financed with KfW loans. It will receive €7m in redemption grants from the German taxpayer.
Without the helping hand from the taxpayer, the project would not have materialised, says Malte Blombach, Aurubis communications manager. He adds that the company’s standard return-on-investment expectations will be missed. While the project will take up to nine years to break even, investments are normally expected to pay for themselves within two or three years.
Environmental activists complain that KfW’s green incentive schemes are not linked closely to the German government’s climate change targets. “[If they were], the required efficiency gains would be much more stringent,” says Matthias Kopp, head of sustainable finance at WWF Germany.
Julia Verlinden, a Green member of parliament, says that, while KfW’s programmes with small and medium-sized enterprise are a “step in the right direction”, they are insufficient. “The federal government so far failed to focus energy taxes clearly on climate protection,” she says.
Mr Brodmann rarely uses the subsidised programmes for sustainability investments. “We just don’t need them,” he says. Smaller projects are covered by annual cash flow, while larger ones, such as the solar panel, are financed with standard bank loans.
Yet even Mr Brodmann’s green enthusiasm has its limits when it comes to the core of his business model. Of Stiftsquelle’s annual mineral water output, 40 per cent comes in single-use plastic bottles, which are the scorn of environmentalists, as plastics pollution of the oceans gets out of hand.
“We cannot position ourselves against the market,” says Mr Brodmann. “The consumer just wants single-use bottles.”
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