Monday, November 1st, 2021
Stricter rules required
How sustainable are sustainability funds?
Sustainable financial products are becoming increasingly popular. However, it is controversial to what extent investors can make a specific contribution to achieving the climate target. Because not everywhere where it says green, there is also green inside.
The coming days will be dominated by the UN climate conference in Glasgow, Scotland. At the invitation of the United Nations, heads of state and prime ministers will debate for two weeks how global warming can be contained to a tolerable level. The topic is also moving more and more investors on the stock exchanges who want to make their contribution or simply want to benefit from the trend towards eco-investments. Sustainable financial products are springing up like mushrooms, but at the same time critical voices are increasing. “There is a lack of consistency and transparency in the entire sustainability sector when aligning climate funds with global climate goals,” according to a recent study by the think tank Influencemap.
Nonetheless, the market for sustainable investment funds has grown by leaps and bounds in recent years. For example, while in Germany in 2005 products with a more or less large focus on the environment, social responsibility and good corporate governance (so-called ESG criteria) collected only 5 billion euros, in 2015 it was 69 billion. In 2020 it was already 248 billion euros, as the latest statistics from the Association for Sustainable Investments show. And even that is only a tiny part of the local fund market.
Empirical studies do not provide any evidence that sustainable funds generate higher returns than conventional financial products. But especially in times of crisis, studies show that they can have advantages such as a more favorable risk profile. According to the analysis company Morningstar, sustainably oriented funds came under less pressure than conventional products during the corona market slump in the first quarter of 2020. The main reason for this was that the fund managers were less involved in the energy sector. Because: Energy companies that rely on fossil fuels and are therefore responsible for a lot of CO2 emissions usually do poorly in sustainability rankings.
The extent to which investors can make a concrete contribution to achieving the climate target with their investment decisions is, however, controversial. On the one hand, you can of course get involved directly in (smaller) wind or solar projects or enable their financing by subscribing to bonds. As a rule, however, this requires precise knowledge of the projects and the funding environment. This is often not so easy, especially for private investors.
Investors have a problem
On the other hand, if you invest your money on the stock market in a climate-conscious way, you have to ask yourself whether there is green in there where it says green. Only recently, according to media reports, an industry giant came into the focus of the supervisory authorities with the fund company DWS. The suspicion: The information on the sustainability criteria in asset management could have been set too high. The subsidiary of Deutsche Bank “firmly” rejected the relevant allegations at the end of August, but is now apparently having them checked internally by a law firm.
A study by Influencemap comes to a sobering conclusion in terms of the effectiveness of sustainability funds. The definition of sustainability is too imprecise and the dissemination of the relevant standards too little. That is why more than half of the climate-related equity funds examined invest mainly in companies whose production does not comply with the Paris climate protection goals. In this respect, it is still difficult for investors to assess what the fund descriptions mean in practice.
The German financial supervisory authority (Bafin) now wants to counteract this with stricter rules. It is not enough for them that since March the European Union has been requiring providers to classify their funds into sustainability categories as part of a uniform procedure – a so-called taxonomy. Instead, it demands that sustainability must also be reflected in the conditions under which the money is invested. Be it via minimum investment ratios, maximum limits, a specific investment strategy or the replication of a corresponding index.