After the climate conference: focus remains on transformation

The world is at a crossroads. Climate change is threatening our environment, our livelihoods and ultimately our future. We have the power, however, to set the course for a more sustainable future. The COP28 conference offered us the opportunity to take this decisive step in the right direction.

Climate change is no longer an abstract threat, but a reality that is manifesting in the form of extreme weather events, rising temperatures and dwindling resources. The earth is virtually crying out for help and we can no longer stand idly by. The COP28 conference is a one-time opportunity to bring the global community together to discuss concrete steps that can protect our planet.

We must fight climate change by drastically reducing greenhouse gas emissions. This requires a change in energy production, the promotion of renewable energies and an increase in energy efficiency. It also requires support for sustainable agriculture and the preservation of forests that serve as carbon sinks. Last but not least, technology and innovation in companies have a central role to play. Avoiding all greenhouse gas emissions and extracting them from the atmosphere with the help of modern technology must become an indispensable part of any climate protection efforts.

However, climate protection without more sustainability in our way of life and production will not lead to success if we do not take into account the fundamental framework conditions within which both take place. The global community must actively work to protect biodiversity and conserve the oceans. The loss of biodiversity is alarming and the health of the oceans is critical to the balance of our planet. We also need to rethink our lifestyles - especially in the northern hemisphere - and make more sustainable choices. This includes reducing plastic consumption, promoting public transportation, supporting local producers and using resources consciously.

Climate change is not only a threat, but also an opportunity. An opportunity to reshape our societies, advance environmentally friendly technologies and create green jobs. We can build a sustainable economy – one based on acting responsibly.

Business activities affect the environment and society across the entire value chain – from production to consumption. Until now, however, the social and ecological impacts have rarely been recorded and therefore play a limited role in the business world. This needs to change. New innovative approaches should be adopted that allow companies to assess their impacts on people and nature and include them in their balance sheets. 

Thanks to the new Corporate Sustainability Reporting Directive (CSRD), it is expected that up to 15,000 German companies will be required to provide standardized reports on any aspects of their business activities related to sustainability. That means aspects such as “immaterial assets” will be subject to mandatory reporting in Germany and the EU for the first time. 

Start-ups that use their business activities to promote transformation, i.e. by creating strategic solutions for social and environmental problems, can generate crucial impetus for the market through their innovative approaches. The reports they issue on how they are contributing to sustainability will be of particular importance as well.

Their so-called impact management can provide start-ups with management-relevant knowledge, allowing them to fully tap their impact potential. In addition, they can demonstrate the social added value of their activities to investors and thus gain better access to the required investment capital.

The annual Sustainability Transformation Monitor (STM) reveals how far German companies have progressed with their transformation. The 2023 results show that the issue of sustainability is much more firmly anchored in the business community than ever before: 83 percent of companies in the real economy and almost 73 percent of financial institutions say that the topic has become “more important” or “much more important” for them. This trend seems set to continue in 2024 as well.

The business community is one of the key players when it comes to sustainable transformation. On the one hand, corporate activities are a main source of greenhouse gas emissions worldwide. This central role, on the other, is what gives businesses the crucial leverage to reduce resource consumption and emissions. It is therefore essential that we support companies in transforming their operations and becoming more sustainable, for example with the right policy mix. The digital transformation of business operations that is taking place at the same time is both a major challenge and a major opportunity to move faster towards greater sustainability.

Companies face the initial challenge of operationalizing both of these transformations, however. A detailed analysis of current studies shows that small and midsized enterprises in particular are in need of greater scrutiny. According to our preliminary study, highly innovative companies appear to be at a regulatory disadvantage at present.

Moreover, companies face the challenge of the so-called twin transition. The mechanisms needed for transformation must first be understood if the potentials that digitalization offers for achieving operational sustainability are to be exploited. Our meta-study suggests, however, that this is rarely the case, since there are too few operational resources available to implement the transitions. Most of the companies surveyed would also like clear ground rules that provide them with effective guidance, especially when it comes to shifting their operations towards greater sustainability.

The sustainable transformation of the economy and society can only be successful in the long term if young people get more involved than they currently are. After all, not only can almost half of young people in Germany imagine volunteering in order to achieve greater sustainability, they can also imagine launching a sustainable business.

Many young people are afraid that the older generation is gambling away their future. They are calling for policies and an economy that are sustainable and intergenerationally just. Young people are particularly affected by the lack of sustainability in society. They are the ones who will experience the negative impacts, which have only begun to make themselves felt. At the same time, they have only limited influence on how things are developing. It’s therefore all the more important that we help young people increase their political participation and strengthen their commitment to a sustainable future.

More than one in three young people in Germany can imagine founding a sustainable business, thereby contributing to sustainable development. Approximately one-quarter of the entrepreneurial activity in Germany can be traced back to individuals under the age of 30. Young people should therefore have the possibility of acquiring the skills early on that they need to recognize and realize entrepreneurial opportunities. Role models and networks for young people interested in becoming founders can increase their motivation to start a business, since they serve as a first point of contact and make peer-to-peer learning possible. At the same time, engaging with young people will require new, digital formats that are both appealing and “shareable” if bridges are to be built between the next generation, young founders and policy makers.

The European Central Bank is also playing an important role in the transformation of the economy. One of its most important responsibilities is fighting inflation. Its most powerful tool to date has been raising the prime rate – a move that has reaped criticism. A growing number of experts are warning that the ECB must not “overcompensate” with its interest rate hikes, since that could jeopardize economic growth, employment and, above all, the climate goals. Alternatives exist, however, to the central bank’s one-size-fits-all interest rate policy. The problem will by no means resolve itself. On the contrary, the ECB will continue to face pressure in the future. The reason for this is the growing scarcity that will make itself felt in coming years. Advancing climate change and the urgently needed ecological transformation are – in addition to aging societies and the trend towards deglobalization – two reasons why we will continue to experience real shortages and thus inflationary pressure in the future. That is one of the key findings from our Megatrend Report #04: The Return of Scarcity. 

The green and digital transition is fundamentally changing Europe’s economy – but a look at its regions shows how much these changes can vary. Economic structures must be adapted for this transition, which is presenting fresh opportunities for some regions in Europe, while posing enormous challenges for others. Greater cooperation among different regions could significantly advance the green transformation. Since technology development is often heavily concentrated in a few, usually very prosperous areas, the creative potential inherent in the diverse regions throughout Europe is not being exploited to a sufficient degree. More cooperation among regions would pool their different strengths and thus accelerate the development of green technologies. In another study, we have analyzed what this means for the energy transition in Europe and why rural regions have an advantage.

Since when have we known that action must be taken? Warnings were sounded half a century ago: 51 years after publication of the Club of Rome’s groundbreaking study “The Limits to Growth,” which depicted several future scenarios, the issue of our finite resources is still extremely charged, both politically and socially. But why is that so? What were the reasons that led to the report being released in the early 1970s? Which new paths did the scenarios take in terms of methodology, and what criticism was expressed as a result? Who funded and developed the study and which conclusions have policy makers drawn from its findings since then? A two-part podcast (Part 1, Part 2) with one of the report’s co-authors, Professor Erich Zahn, provides insight into 51 years of social and policy debates on the issue of sustainable transformation.

For individuals and for society, sustainable transformation always means shifting from one way of living and working to another. Such shifts often result in uncertainties and insecurities for both policy makers and the public. These uncertainties, however, can be addressed in a positive narrative of sustainable transformation. In our podcast with Michael Roos, Professor of Economics at Ruhr University Bochum, we discuss what such a narrative of transformation – which Germany’s Expert Council for Climate Issues has also called for in its current position paper – might look like.

Finally, in our latest podcast transformation researcher Maja Göpel provides us with singular insights into the current political and social debate on sustainable transformation.

The energy transition is a job creator, that much is clear. In other areas, however, the picture is different. Russia’s war of aggression against Ukraine and the subsequent energy crisis have triggered a fierce debate about Germany’s attractiveness as a business location, particularly for energy-intensive industries. Against the background of a world order that has suffered massive dislocation, huge price shocks and worsening climate change, the question arises of whether Germany’s industry-based economic model can remain viable in the future. Is the country threatened with widescale deindustrialization and, if so, which countermeasures should Berlin and Brussels take? Which economic and strategic considerations must be weighed? And what should the reaction be to the immense subsidies the US is deploying to promote its own green transformation? The authors elucidate known and new risk factors, providing recommendations on how Germany can win the competition among green business locations. They agree on numerous points in the industrial plan laid out by German Economic Minister Robert Habeck – but still see the need for additional tweaking.

Germany has set itself ambitious targets for the energy transition. If it wants to achieve them, it will of course need more wind turbines and photovoltaic systems. But even that won’t be enough. Installing new technology requires skilled workers trained to do the job. Demand for workers in the wind and solar sectors has been booming since 2019 – albeit at a relatively low level compared to the overall labor market. Firms are looking for electricians and roofers in particular, according to our Jobmonitor study on occupations related to the energy transition.

Overall, however, the fear that the transformation of the economy could cost the workforce is unfounded. On the contrary: continuing as before would mean the loss of 600,000 jobs; even if the measures set out in the coalition agreement are implemented, around 600,000 new jobs could be created by 2040.

And even in the automotive industry, which could be one of the supposed losers, there is reason for optimism. This is because for many workers whose jobs could be lost in the industry, there are the best transition paths to jobs that can be achieved with just a few additional qualifications.

The circular economy is also a prime example of how key, overarching goals must be tackled centrally and not left to be crushed between the millstones of competing government ministries and departments. Achieving that goal in Germany will mean appointing “mission owners” who report directly to the country’s chancellor. They could oversee efforts to address the major issues, which includes achieving climate neutrality and – on a smaller scale – creating a circular economy. In the last two decades, Germany has lost its status as a pioneer here. Focusing on the mission – i.e. pooling responsibilities in one place – could bring new momentum to interdisciplinary challenges such as developing an economy based on circular principles. We’ve analyzed how adopting a mission focus could accelerate the transformation.

With or without central control this much is certain: The goal cannot be reached without innovating. And this is precisely where the German economy has some catching up to do. The share of innovative enterprises in the country has declined rapidly in the past three years. Today, only one German company in five can still be considered highly innovative. This is also worrying because innovative enterprises drive sustainability. In their study on innovative business culture in Germany, our experts examined where companies have a lot of lost ground to make up for, and what a truly pro-innovation business environment would look like. In our podcast “Zukunft gestalten” (Shaping the Future), Almut Rademacher, CEO of trade association OWL Maschinenbau, explains why innovation is so important and how it is driving the success of both recognized and hidden champions in the East Westphalia–Lippe region.

Part of the transformation will definitely be using natural resources wisely. The consistent implementation of a circular economy would help save raw materials and reduce the impact on the environment. Those are the findings from a recent study by WWF, for which the Bertelsmann Stiftung served as a knowledge partner. Compared with a business-as-usual scenario, global environmental costs could be reduced by up to €157 billion by 2045. The circular economy is more than just the recycling of waste. Rather, it’s about minimizing the use of primary raw materials, finding alternatives, or processing the products or materials that have been used so they can be used again. Each sector faces its own specific challenges when it comes to ensuring materials can be used repeatedly (e.g. in the textile industry). This type of production requires a policy framework – on the European, the national and even the local level (see e.g. Circular OWL) – that supports the necessary processes. Moreover, the idea behind circular production and the relevant applications must be better disseminated so that small and midsized enterprises also have access to these innovative ways of doing business. Our analysis shows the positive macroeconomic effects that could accrue by 2045 from introducing a circular economy.

As these pitfalls of carbon pricing show, one state alone can neither slow the consequences of climate change, nor finance them. We need to take a global view. First of all, this means admitting that the industrialized nations have been – and still are – the biggest polluters, while many emerging and developing countries were among the first to experience the catastrophe of climate change. As a result, prior to the 2021 UN Climate Change Conference in Glasgow, our experts had already called for the assumption of fiduciary liability.   

Taking a global view is important, but it will be impossible to overcome climate change without including cities, towns and regions. Municipalities bear the main responsibility for three key areas: the energy transition, the heating transition and the transport transition. If energy is to be produced and distributed in a decentralized manner, communities must expand their grids, develop decentralized sources of energy, and supply consumers with green electricity. In light of Germany’s new regulations for heating systems, the country’s municipalities bear the main responsibility for ensuring all residents will be able to heat their homes in a way that reduces CO2 emissions. Moreover, mass transit at the local level will play a key role in the transport transition. Yet a number of basic prerequisites must first be met: To overcome all the challenges, local authorities need an adequate legal framework. And they need money for the necessary investments – money they don’t have, as the Bertelsmann Stiftung’s 2023 Municipal Financial Report shows.

Municipalities play an important role not only in climate protection, but also in achieving sustainability in general. Our SDG portal – offering information on all municipalities in Germany with more than 5,000 inhabitants and all rural districts – and our Mid-Term Review of Agenda 2030 show from a national perspective the progress the country’s communities are making here, along with where there is still room for improvement.

At the same time, it’s not enough to take action in one country alone. Climate protection is a global task – and Europe must play a leading role here. The first step has already been taken: “Fit for 55” is the EU goal with a catchy name and very ambitious rationale: the Community wants to become climate neutral by 2050 at the latest and emissions are to be reduced by 55 percent relative to 1990 levels by the end of the current decade. This can’t be achieved without drastic measures. CO2 has its price, and those who emit it face progressively increasing taxes. This has serious implications for Europe’s economic competitiveness, however, which is why the Carbon Border Adjustment Mechanism (CBAM) is also being introduced. As one would expect, the mechanism is highly controversial – and certainly not a magic bullet. We explain how the CBAM works. It could be a major problem for the EU’s less developed neighbors in particular, since their chances of exporting to the EU would decline. The EU should therefore consider whether and how it wants to provide financial support to neighboring countries.

As these sample calculations show, it is not sufficient to focus on transforming the economy at an uncertain time in the future. Manmade climate change is already costing us a lot. In addition to the direct financial burdens, it is also posing new challenges for the financial sector, our experts warn. In recent years, taxes on labor and capital in Germany have risen considerably more than environmental taxes, such as vehicle fees, truck tolls and carbon pricing. At the same time, environmentally harmful activities have been subsidized to the tune of €65 billion. Reforming the 10 most climate-damaging subsidies alone, however, would generate additional revenue of up to €46 billion and reduce greenhouse gas emissions by almost 100 million tons.

The problem: Germany currently has a hodge-podge of subsidies, which our experts have examined collectively, and in detail for the key sectors of industrial production and transport. Although reducing “superfluous, ineffective and ecologically and environmentally harmful subsidies” is part of the coalition agreement signed by the current government, the prospects of achieving that objective are extremely poor, for a variety of reasons. According to the German Environment Agency (Umweltbundesamt, UBA), the German state granted 41 subsidies in 2018 – as financial aid and tax breaks – that promote the use of fossil fuels, thus undermining efforts to effectively protect the environment. And the amount allocated is huge: At a minimum of €65 billion each year, the subsidies equal the third round of relief measures passed by the German government in response to the energy crisis. Streamlining is thus urgently needed here.

The dry numbers alone show how urgent a change of course is. If Germany were to reduce emissions of its climate-damaging greenhouse gases by an average of 15.5 million tons per year, as it did between 1990 and 2022, it would not reach climate neutrality in 2045 as planned, but only 20 years later, in 2065.

In purely mathematical terms, two scenarios are conceivable in which Germany could reach its climate target within the set timeframe. Possibility 1: If greenhouse gas emissions per euro of economic output – known as emissions intensity – were to fall at the same rate as they have over the past 30 years, then real gross domestic product (GDP) would have to decline by an average of more than 7 percent per year. This is unimaginable, however. Possibility 2: If GDP were to grow by an average of 1.25 percent per year as it has over the past 30 years, then emissions intensity would have to fall by an average of more than 11 percent annually until 2045. As a result, we have to go beyond the conventional wisdom that economic growth must necessarily be harmful to the climate. Our experts have worked through what that means. Hard to comprehend? Perhaps. But anyone can easily see for themselves how emissions and growth are linked – using our decoupling calculator for Germany.

Germany likes to present itself as the star pupil when it comes to climate protection. Yet it’s far from achieving the goals it has set for itself. Although Germany’s Climate Protection Act is one of the most ambitious and strictest in the world, there is a wide gap between aspiration and reality. The country has never been able to reach its climate targets in all sectors, and some areas such as buildings and transport are lagging far behind. Moreover, its desired contribution to the 1.5-degree target would not be achieved even if it were to meet all the legal requirements it has put in place. One thing is clear: Its climate policy needs new momentum. We’ve compiled an analysis of how aspiration and reality diverge to show where this momentum must come from and what needs to happen next. All available levers must finally be activated to combine across-the-board climate protection with social justice and social prosperity.

After all, both of these factors are needed to succeed. It’s important that the urgently required reductions in emissions not be “bought” with a targeted reduction in economic activity – since this would give rise to considerable economic dislocations and social tensions and thus further jeopardize acceptance of the steps we must take and the climate goals themselves. What we need instead are widescale innovations that allow us to produce our goods and services with fewer and fewer emissions.