Sustainable investment is becoming increasingly popular

While sustainable investments were once only widespread at a few church and cooperative banks, today banks and fund providers outdo each other with offers for clean investments. What about the return?

When there is a lot of wind blowing and the sun is shining, there is often more electricity in Germany than is needed.

NSustainable investments are becoming increasingly popular with German investors. Funds that take into account criteria such as the environment, social issues and good corporate governance when making investments are very popular, as data from the industry association BVI show. Accordingly, the managed assets in sustainable mutual funds, in which private and professional investors are allowed to invest, more than doubled within five years: from 15 billion euros at the end of September 2014 to 31 billion euros this autumn. Pressure comes from the EU, which could definitely anchor the topic in bank advisory meetings for savers.

While sustainable investments were once only widespread at a few church and cooperative banks, today banks and fund providers outdo each other with offers for clean investments. Not least because the green zeitgeist is driving the topic forward: In view of the mega-topic of climate change and the hype surrounding activist Greta Thunberg, the financial markets are also seeing themselves more under pressure.

But sustainable funds are still a niche. They have a market share of around three percent of the total assets in retail funds, which last totaled EUR 1.079 trillion (EUR 1,079 billion) at the end of September. “The topic has not yet reached a broad level among private investors,” said Sina Hartelt, sustainability expert at the Scope rating agency.

Sustainable funds are still a niche

In the case of sustainable funds, shares in companies that earn money with coal, oil, tobacco, weapons or alcohol are usually excluded. According to this, providers often choose the “best in class” from the rest of the investment universe – the cleanest chemical company or car manufacturer. And some approaches aim to have a good effect with financial investments, such as cleaner seas (“impact investing”).

So far, clean systems have played a role above all for large investors such as pension funds and foundations. According to BVI, they have sustainably invested a good 50 billion euros through special funds. And according to the fund provider Union Investment, 72 percent of professional investors in Germany consider criteria such as the environment and social issues.

“For many consumers, sustainability is already a high priority in their regular purchases – from baby food to household products,” says the Deutsche Bank fund subsidiary DWS. “But they are not aware that they can also pay attention to this when it comes to investing.” That could change soon:

EU promotes sustainable investments

Because the EU promotes sustainable investments in order to meet the Paris climate targets. Brussels wants to reduce greenhouse gas emissions in the EU by 40 percent by 2030 compared to 1990 levels. The Commission estimates that 180 billion euros would have to be invested in a climate-friendly way to achieve this. Since public investments are not enough for this, private individuals should be encouraged.

In the future, for example, a “Paris label” will mark investments that are in line with the climate agreement. This is to prevent financial products from being wrongly labeled as “green”. “In future it will be easier for investors to choose climate-friendly projects,” said Romanian Finance Minister Eugen Teodorovici.

The pressure should drive sustainable investments, believes the BVI. Because, according to Brussels’s will, bank advisors could already be obliged to ask savers whether they want to invest their money sustainably – documentation included. Mandatory references to the climate impact of investments are also discussed. That is not yet certain. The fund association is critical of the plans: What capital managers do not need are “rigid guidelines that mean that investors can no longer freely decide what to invest in”.

Solid return

Meanwhile, the trend is gaining momentum as big names in the financial world are publicizing themselves green. Allianz, for example, has formed an alliance with other insurers and funds that aims to reduce the CO2 emissions of its systems to net zero by 2050. And Deutsche Bank has not financed any new coal-fired power plants for a long time. Environmental initiatives are also putting pressure on them: the 15 largest asset managers in the world are not using their market power enough for climate-friendly investments, complained the InfluenceMap initiative.

In the case of sustainable investments, however, not only charitable motives play a role. The diesel scandal at VW has made it clear to many investors that it can be worthwhile to pay attention to good corporate governance: the carmaker’s share has since collapsed. Large investors also want to rule out the risk of legal action, for example with tobacco companies.

Those who invest money “cleanly” do not have to forego returns. On the contrary: Sustainable equity funds with a European or global focus, viewed over three and five years, perform slightly better on average than conventional competing products, according to Scope data.

“The realization that sustainable investments often pay off is growing,” said Hartelt from Scope. Fund managers asked companies more often critical questions, for example about working conditions at suppliers. Hartelt has recently observed “extremely much” movement at financial houses. “Some hired entire teams with sustainability experts.”