DWS unveils ‘Framework for European Transformation’ research

DWS published its first research report “A Framework for European Transformation” as part of its efforts to address growing demand for research about, and financial instruments to support, the upcoming fundamental economic transformation of the European continent.

Francesco Curto, Global Head of Research at DWS said: “The foundations on which European prosperity and security have been built for the past seventy years are no longer fit for the future. It faces challenges ranging from changes in the geopolitical landscape, through demographics and competitive dynamics and climate transition.” 

Europe, and specifically the European Union (EU), has been in a constant state of flux since well before the formal establishment of the EU in 1993. For decades to come, Europe will need to make substantial investments to transform its economies, reduce outside dependencies, and build a sustainable industry landscape – as the continent aims to protect its current high level of living standards and to lay foundations for future prosperity. According to the EU Commission, it estimates that the EU green transition and digital transformation will require at least EUR 595 bn per year in the transport, buildings, power, and industrial sectors^[1].

DWS announced last week they intend to launch a family of investment solutions to address European Transformation funding gaps as well as to fund a “Centre for European Transformation” with the Frankfurt School of Finance & Management.

Francesco Curto continued: “The European transformation requires significant capital deployment.  It is essential that private capital fills the role of enabling such transition and we see it as one of our responsibilities to step in here and contribute. Private markets are mostly already ripe to enable the European transformation. It is more challenging for public markets, where both policymaking and investors need to change their approaches, and balance better short- term dynamics with the long-term view”

The report is designed to help understand the task and provide food for thought on what political, regulatory, and capital-market-related steps are needed to make the European transformation possible to support informed decision-making processes in both politics, and the economy.

DWS has identified four focus themes which offer immediate opportunities to mobilise private capital so that it plays an active role in European Transformation, led by the belief that longer-term nature of private markets is currently better suited for driving European transformation:

• EU Green Transition: Part of the Green Transition will be financed by the EU and member states, but there will still be a significant annual funding shortfall to meet the targets.
• Transforming European Corporations: Some transformation will require significant investments from corporates in areas such as batteries and the development of an electric grid, and regulators will need to enable partnership structures to bring activities outsourced to Asia back to Europe.
• Transforming European Commercial & Residential Real Estate: Touching almost all parts of the economy and society, real estate will play a pivotal role in European Transformation. From reducing carbon emissions, renovating and improving build stock quality, and considerations of air quality to biodiversity, and water stress to physical climate risk, real estate investment will be both subject to these risks, and part of the solution. Moreover, the availability of affordable housing in urban areas is becoming a more pressing societal problem in many European countries.
• Transforming European Infrastructure: The transformation of Europe cannot occur without the foundational infrastructure that the economy and wider society relies upon being at the heart of that change. Capital requirements span across energy, industry, mobility and social infrastructure where old assets need transitioning and new assets need building.

The research report also identifies the obstacles why Europe is struggling to finance transformative projects and outlines the need for transformative policy making. With regards to sustainable investments, which form a significant part of the funding gab, DWS identified six issues to be addressed by Europe’s sustainable finance policies:

1. Simplify the confusion around ESG: Investors spend a significant amount of time making sense of ESG datasets, which have grown to 10 million plus data points covering 35,000 issuers highlighting operational risk. DWS research recommend to simplify and integrate into financial reporting to enable investors to focus on the more important matter of sustainability, or double materiality.
2. Ensure that investors in public markets are not at a structural disadvantage to private investors or financial investors: Public markets can play an essential role in transitioning capital to a more sustainable future by ensuring ‘troubled’ economic activities have proper governance and operate in line with evolving requirements of sustainable investors.
3. Develop a ‘double materiality’ sustainable set of accounts managed by an independent body: DWS research believes that sustainability requires sustainability standards that integrate science into finance, rather than the finance view of what sustainability means.
4. Levelling up fees at consumer level for products that are only focused on financial return and products that are sustainable in nature: We believe this will ensure that sustainability is not at a disadvantage in capital allocation decisions, with the additional fee diverted to set-up a trusted framework to enable the transition into a sustainable future. Europe is in dire need of a European Center for Climate Change, which could be set-up following the example of the CERN (European Organisation for Nuclear Research).
5. Develop a framework to classify issuers whose economic activities are recognised as posing systemic risks to the environment: Similar to banking, companies whose economic activities are potentially at risk for destabilising earth systems are recognized as ‘systemic risks’.
6. Develop an investment framework for the sourcing of the resources considered fundamental to climate transition: The net result of ignoring the idea that we can transition to net zero with no investment in mines, steel, cement or gas, is that Europe is creating global dependencies at the same time as other countries are developing strategic resources. EU must develop a net-zero sourcing strategy as a matter of urgency. Most Article 8 and 9 disclosing funds ignore this fact.

Other key measures and observations noted in DWS’ report include:

• Europe needs to address its lack of dynamism. With venture capital across the continent estimated to be just 0.1% of EU GDP, the absence of large IT-related companies in European equities is a clear indicator that inertia and incrementalism has come at a high cost to investors over the past decade
• Europe’s major companies should consider new types of partnerships with asset managers to decarbonise supply chains and permanent carbon sequestration
• As well as transforming existing European commercial real estate, it should also be considered an important component of supply chains associated with future geopolitical change
• European infrastructure presents compelling opportunities given the vast array of projects associated to creating an economy that is climate resilient
• Transformation projects and partnerships in emerging markets (EM) ought to aim at ensuring sustainability throughout the supply chain as the focus of investments

Note to the editor:

Media information Dec 6, 2022:

Deutsche Bank, DWS set European Transformation as strategic priority