The Knowledge Hub of IMD
Share
FacebookFacebook icon TwitterTwitter icon LinkedInLinkedIn icon Email

Sustainability

Why German business shouldn’t fear a greener government

Published 21 September 2021 in Sustainability • 6 min read

 

Should Germany’s Green party score a big enough share of the vote in a federal election on 26 September to enter the next coalition government, business should embrace the opportunity to accelerate a shift to sustainable business models, argue IMD professors Patrick Reinmoeller and Karl Schmedders.

Long ignored by German industry, which feared being throttled by regulation, Germany’s Green party has a strong chance of playing a role in the next coalition government with opinion polls predicting they will secure between 15% and 17% of the vote, up from around 8% four years ago. 

Devastating floods in Germany this summer have heightened concerns about the impact of climate change and piled pressure on companies and politicians to do more to try to limit the impact of global warming. 

Following a successful challenge by a group of young climate activists, Germany’s top court ruled in late April that the government must overhaul its climate laws by the end of next year to set out how it will cut emissions to almost zero by 2050. Ironing out the details of this plan will be on the to-do list of the next government. 

The Greens have put forward an ambitious manifesto. They want to achieve greenhouse gas neutrality in 20 years through a massive expansion of renewables and by phasing out coal-fired power stations and combustion engines by 2030. Annalena Baerbock, the Greens’ candidate for chancellor, has framed this as a “pact with industry” and an opportunity for politics and business to collaborate on the road towards climate neutrality. 

So how should German industry approach a government in which the Greens may form a part? 

Embrace the opportunity to be at the forefront of sustainable innovation 

Patrick Reinmoeller, Professor of Strategy and Innovation at IMD, said it had been a mistake for industry to ignore the Green party for so long, as they had missed out on the chance to capitalize on sustainability sooner. 

“Seizing that opportunity earlier would not have led to the rise of Tesla,” he said, noting that the Tesla model 3 was the third best-selling mid-size car in the world in the first half of 2021, according to market intelligence company Focus2move.com. 

While the pledge to phase out combustion engines by 2030 is ambitious, Daimler, the inventor of the modern motor car, already announced plans in July to spend more than 40 billion euros (46 billion USD) on electrification, with Chief Executive Ola Källenius saying the luxury carmaker wants to be dominantly, if not completely, all electric by the end of the decade. 

Likewise, German utility RWE, which used to rely heavily on nuclear and coal, issued a 500 million euro green bond in June 2021 to fund wind and solar expansion. Chief Executive Markus Krebber has called for the new federal government to speed up the shift to renewable energy by increasing targets. 

Reinmoeller said it was right for industry to view tougher targets as an impetus for phasing out old technology. COVID and a renewed sensitivity of our dependence on the natural environment is forcing a change on companies,” he said. 

Moreover, business might be able to use any policies that emerge from a partly Green government as an excuse to pass on the higher costs of transformation to customers, he said. 

Even the Greens’ call to end industrial livestock farming in the next 20 years could offer a huge opportunity for German farmers. While they may have to endure some short-term pain, in the long run they will have a first-mover advantage in sustainable farming. 

“I think it’s an opportunity to take on the challenge and do something earlier than others,” he said. 

German industry is prepared for a Green government 

At IMD, there has been a burst of interest and openness for the ESG topic with more and more companies asking for training on this in response from demands from consumers and shareholders, said Karl Schmedders, Professor of Finance. 

As a result, he believes German business is prepared for tougher environmental regulation with many having already drawn up contingency plans for this very scenario. Likewise, having the Greens in power might also serve as a handy excuse to justify some policies to certain shareholders, he said. 

In addition, the prospect of the Greens in government has become a lot less scary for many companies who have witnessed the pragmatic way in which Winfried Kretschmann, a Green, has run the state of Baden-Wuerttemberg over the past decade. 

Home to carmakers Daimler and Porsche and automotive supplier Bosch, the Greens were conscious that introducing draconian policies around carbon emissions might alienate many of their voters. Instead, they have sought to work together with industry and launched a strategic dialogue with carmakers on how to expand the production of electric vehicles. 

Business gambling more pragmatic Greens will prevail 

In Baden-Wuerttemberg, the Greens govern in a coalition with the conservatives and Schmedders said a similar model at a national level or a three-way tie-up with the business-friendly FDP would be palatable to many business leaders. 

But betting on that outcome is risky. With less than a week to go, the election is too close to call and many voters remain undecided. The latest polls show the centre-left Social Democrats (SPD) and their chancellor candidate Olaf Scholz are in front with around 25%. 

The Greens would rather be in government with the SPD and the FDP than the conservatives. The FDP has been cool on the idea and should this combination not work out, there is some tail risk that the radical wing of the Green party advocates for a coalition with the SPD and the Left. 

The Left want to expropriate the housing stock of Deutsche Wohnen, the largest landlord in Berlin, and transfer the apartments to a public institution — a policy that is vehemently opposed by business which says such a move would stifle much-needed investment in housing. 

In their election manifesto, the Greens are in favour of the plan to bring at least 50% of all apartments in Berlin “into the hands of the common good.” They also support the possibility of a rent cap.

Economic theory tells us that price regulation can have a lot of negative consequences, said Schmedders. “The big question is which side of the party – the pragmatic ‘realos’ or the more radical ‘fundis’ – will be in charge if they get into government?” 

 

Authors

Patrick Reinmoeller - IMD Professor

Patrick Reinmoeller

Professor of Strategy and Innovation at IMD

His teaching, research and consulting focus on strategic thinking for senior executives. He is the co-director of Asian Innovation strategies program.

Karl Schmedders - IMD Professor

Karl Schmedders

Professor of Finance at IMD

Karl Schmedders is Professor of Finance at IMD. In his research, he applies numerical solution techniques to complex economic and financial models, shedding light on relevant market issues and industry problems.

Related

Learn Brain Circuits

Join us for daily exercises focusing on issues from team building to developing an actionable sustainability plan to personal development. Go on. They only take five minutes.
 
Read more 

Explore Leadership

What makes a great leader? Do you need charisma? How do you inspire your team? Our experts offer actionable insights through first-person narratives, behind-the-scenes interviews and The Help Desk.
 
Read more

Join Membership

Log in here to join the conversation with the I by IMD community. Your subscription grants you access to the quarterly magazine plus daily articles, videos, podcasts and learning exercises.
 
Sign up

Welcome to I by IMD

Install
×

You have 4 of 5 articles left to read.