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12/13/2019Greta shares - which investment is really sustainable?
Christoph Rottwilm
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Rob Ostermaier / The Virginian-Pilot / AP
Climate activist Greta Thunberg on a sailboat: Which investment is really sustainable?
Climate protection and sustainability have become dominant issues - also when investing. But which investment meets these criteria?
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Person of the year at the American "Time" magazine: Although the award is basically of no real importance, it is widely recognized worldwide. This year, the title goes to Swedish climate activist Greta Thunberg, as "Time" announced this week. It is just one of many examples of the importance of environmental protection and sustainability for many people around the world.
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Even investors. The volumes that private and institutional investors have invested in sustainable investments worldwide have been increasing for years. Prominent large investors such as the Norwegian sovereign wealth fund are committed to this, and hardly any investment company escapes the (marketing) trend of launching investment products under the green label, especially industry giants such as the US giant Blackrock.
That should continue for the time being. The experts at the Sustainable Investment Forum (FNG), for example, expect investment amounts in the sustainability or ESG sector to increase further in the coming years ("ESG" stands for "environmental, social and governance"), also in 2020. The US company JP Morgan Asset In any case, management writes in its outlook for the coming year that the focus of the financial world will be even more on sustainability. Investors who don't respond could be left behind, the company said. In any case, studies have shown that ESG investments are by no means inferior to conventional ones when it comes to returns.
This raises the crucial question: What is a sustainable investment? And how does an investor know that he is really dealing with one?
What appears simple at first glance turns out to be an enormously complex problem when you take a closer look. After all, terms such as "sustainability" or "sustainable investment" are by no means clearly defined. There is no clear, possibly even globally recognized standard for what requirements have to be met for an investment to be given an ESG label.
Instead, there are a variety of different approaches to this topic. The FNG alone lists eight different ones in an overview, including the definition of exclusion criteria, for example in relation to the emission of the climate-damaging gas CO2, impact investment and the exercise of voting rights in an ESG-compliant manner. At EU level, work is currently underway on uniform ESG requirements for companies and financial institutions. It will take some time, however, until final results are available.
Many funds continue to violate sustainability principles
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As long as there is not much more left for investors than to stick to the hundreds of investment funds and ETFs for the general public in the German-speaking area alone, which, according to the provider and the respective product name, are specifically aimed at ESG-compliant investments. With the rest of the fund universe, green investors are more at the wrong place, as just a comprehensive analysis showed.
The consulting firm CSSP, based in Liechtenstein, has examined around 2,700 equity, bond and mixed funds with a volume of around EUR 1.9 trillion with a view to possible violations of ESG criteria. Mind you: funds that are not committed to the ESG label.
And lo and behold: depending on the regional orientation, the analysts actually found violations of sustainability standards in some cases more than 90 percent of the funds under review, such as those prescribed by the ten rules of the internationally recognized "UN Global Compact". Part of this "world's largest initiative for responsible corporate governance", as it says on their website, is, for example, respect for human rights, the fight against forced labor and corruption and a commitment to greater environmental awareness.
But the selection of an investment product that is certified as ESG-compatible also has its pitfalls. After all, this mega-topic is like many others: everyone tries to earn money by including black sheep in the market. They sometimes carry out so-called greenwashing, so they give companies or investment vehicles "green", even though they are not at all when they are looked at closely.
The result: In the end, every investor is more or less on his own when answering the sustainability question, for example with regard to investment funds or ETFs - and this can be tedious. "The answer to the question of whether an investment is sustainable or not is not an easy one," says Jan Tille, head of research at Absolut Research in Hamburg.
"For the most part, investors have to rely on the information provided by the providers. ESG ratings and sustainability seals can also provide orientation despite differing priorities. After all, hardly any private investor can analyze every fund or index in which he wants to invest in detail and every company, that is in it, look in detail. "
ESG ratings help only to a limited extent
Tille is addressing a crux: There are analysis companies such as the US company MSCI or the 40 percent Morningstar subsidiary Sustainalytics, which assess the ESG suitability of funds and submit corresponding ratings. However, even these may not set the exact standards that an investor imagines.
The example of dealing with the topic of nuclear power is suitable. Many are unlikely to consider investing in companies that make their money from nuclear energy from a sustainability perspective. Sustainalytics, an analyst specializing in sustainability, sees it differently. In his opinion, nuclear power can also be positive in terms of ESG requirements. Nuclear power is by no means on the black list at fund provider Mirova, who at least presents itself as a proven sustainability specialist.
This makes it clear that the answer to the question of whether an investment is sustainable or not depends above all on how differentiated and strictly the concept of sustainability is interpreted. Every investor who asks himself this question must first of all be clear about his own requirements.
Christoph Rottwilm on Twitter
@Christoph Rottwilm
Last but not least, the example of the Swede Greta Thunberg shows how extreme a point of view can be. The climate activist recently crossed the Atlantic twice in a sailboat on her trip to the USA to prevent CO2 emissions as much as possible. Investors who set a similarly high benchmark for sustainable investment should, however, be aware that they will probably only find very few investments that meet this requirement.
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