- 80 per cent of institutional investors in Germany use sustainability strategies
- Investor engagement is regarded as highly effective in promoting the sustainable transformation of the economy
- 83 per cent of respondents anticipate significant growth in the volume of sustainable investments
- Three quarters are in favour of a CO2 price of €63 per tonne – more than double the price envisaged in current plans
- Sustainable companies are more resilient to crises
The intense debate around sustainability in recent years has left its mark on the portfolios of institutional investors in Germany. The number of institutional investors who have not adopted ESG investment strategies has shrunk to just a handful, while the proportion of those who do invest sustainably recently climbed to a record level of 80 per cent. This is one of the key findings of Union Investment’s annual sustainability study. This year, 166 institutional investors – responsible for several trillions of euros in assets under management – participated in the study.
In Germany, 80 per cent of institutional investors now use sustainable strategies in their investment activities – the highest level ever recorded. Last year, this figure stood at 72 per cent, while five years ago, only 60 per cent invested sustainably. “The fact that four fifths of institutional investors now include sustainability criteria in their investment decisions shows that the intense debate around sustainability and climate change has been effective,” says Alexander Schindler, the member of Union Investment’s Board of Managing Directors responsible for business with institutional clients. “Most investors are aware that sustainability has become an important investment dimension. After all, ESG criteria help investors to gain a clearer picture not only of the risks but also of the investment opportunities associated with sustainability.”
Investors’ knowledge in relation to sustainable investing has also improved. Five years ago, only 38 per cent rated their own knowledge of the subject as good or very good, whereas now, 60 per cent claim this level of expertise. The proportion of investors who are satisfied with their sustainable investments has also risen significantly. Over the past five years, it has increased from 43 per cent to 56 per cent.
More than half (56 per cent) of the assets held by institutional investors who apply sustainability strategies are invested in accordance with environmental, social, ethical and governance criteria. Unsurprisingly, this ratio is particularly high among church organisations and charitable foundations (75 per cent). But insurance companies also scored highly in this respect with 66 per cent.
Shareholder engagement is credited with being very effective in promoting sustainability
Exclusion criteria are the most common method for selecting sustainable investments. They are used by 92 per cent of investors who apply sustainable strategies. But at the same time, three quarters (74 per cent) of the respondents were opposed to excluding companies from sustainable portfolios that have plans for transforming into a sustainable business but have not yet completed this process. “The most interesting companies from an investor’s point of view are those undergoing a transformation. As an active and sustainable investor, you want to identify and support these companies before the wider market takes notice of their potential,” emphasizes Schindler.
The next most common selection approach after exclusion criteria is the use of a negative screening process (72 per cent), followed by positive screening (58 per cent) and the best-in-class approach (55 per cent). Only a third of the respondents (34 per cent) actively engage with the companies they have invested in, even though 57 per cent of them describe this form of dialogue as particularly effective. “Practising engagement as an active investor is time-consuming, but it is also a highly effective tool for persuading companies to adopt the sustainability preferences of investors in a targeted and lasting way. Consequently, it makes sense for institutional investors to use third-party service providers to pursue an engagement approach.”
Investors anticipate significant growth in the volume of sustainable investments
The vast majority of investors believe that the importance of sustainable investment strategies will continue to grow in the future. Of the survey participants, 83 per cent anticipate a strong or very strong increase in the volume of ESG investments over the next twelve months – an increase of 14 percentage points compared with last year’s figure. Persistent regulatory pressure was cited by 70 per cent of the respondents as the reason for intensifying their involvement in sustainable investing. The same proportion of investors also regard climate policy-related regulation as generally useful and believe that sustainable investing can have a positive impact on the future of our planet’s climate.
Investors in Germany agree on one crucial point: The transformation towards a sustainable economy will shake up the existing order and entail new opportunities and risks for the capital markets. However, not all sectors and business segments offer the same scope for opportunities. German institutional investors believe that the energy sector (95 per cent) and the transport and mobility sector (93 per cent) hold particularly great potential for sustainable investment.
Three quarters are in favour of a CO2 price of €63 per tonne – more than double the price envisaged in current plans
In this context, investors are focused primarily on climate change and its associated risks and opportunities. Of all survey participants, 92 per cent believe that the capital markets have not yet priced in climate risks to an appropriate degree. The majority (55 per cent) regard the plan of putting an initial price of €25 per tonne on CO2 emissions – an idea that forms part of the German government’s climate package – primarily as an opportunity for the German economy rather than a risk. However, around three quarters of the respondents (72 per cent) think that the price of €25 per tonne, as suggested by the German government, is actually not adequate. Instead, they advocate a figure of around €63 on average – more than twice the suggested cost.
Sustainable companies are more resilient to crises
The fact that investors are very satisfied with their ESG investments can be attributed, at least in part, to the performance of these investments. Out of 130 respondents who use both sustainable and conventional investment strategies, only two stated that their sustainable investments generated a lower return than their conventional portfolios. By contrast, 12 per cent reported that their sustainable investments performed significantly better.
With regard to risks, 25 per cent believe that their sustainable portfolio has a clear edge. A little over half of this group of respondents (59 per cent) stated that their sustainable and conventional portfolios delivered a similar performance and just under half (46 per cent) felt that both were roughly on a par in terms of risk. “These findings underpin the results of several studies, which generally found that sustainable strategies do not come with a disadvantage in terms of performance and may, in fact, even offer slight benefits. In addition, it seems that sustainability-focused strategies have so far weathered the current coronavirus crisis slightly better than conventional strategies,” Schindler attests.
Union Investment said it came to this conclusion based on an analysis carried out by the company’s portfolio managers in a context unrelated to the sustainability study. For the purposes of this analysis, they had first defined the MSCI World as the investment universe. This index, which comprises 1,640 securities from 23 industrialised countries and encompasses a broad range of sectors, is a reliable indicator for the global equity market. Then, the Union Investment team grouped all companies in the MSCI World by sector and ranked them according to their ESG score. For the purposes of a highly simplified investment strategy, it was assumed that equities of the top 20 per cent of companies in the ranking were purchased, while shares in the lowest-ranking 20 per cent of companies were shorted.
The findings from this analysis only represent a snapshot, but nonetheless, it was apparent that the performance of ESG strategies has so far been more robust in the current crisis than that of the market as a whole. The sustainability-focused portfolio not only mitigated the impact of the immense losses in the global equity markets, but even generated a positive overall performance, which was partly attributable to the short positions in the portfolio. “The underlying causes of this phenomenon are not exclusively related to sustainability factors. But there are clear indications that companies with a very sustainable business model are more resilient to crises,” concludes Schindler.