Sustainable funds in the “climate laboratory”: Those who want to invest green are lost

More than 335 billion euros Germans have now invested in green investments. This sum increases by around 25 percent every year, and sustainable funds are particularly popular as investments. Their volume has almost doubled in the past two years. However, it is often a case of fraudulent labeling Magdalena Senn in the “climate laboratory”. The financial market expert from Finanzwende Recherche examined 314 supposedly green and sustainable funds and came to a sobering conclusion: Many ESG funds operate “Greenwashing on a grand scale”.

ntv.de: If you look at the results of your study, you have to realize that anyone who wants to invest green is hopelessly lost, correct?

Magdalena Senn: You could say that. If you want to invest green and sustainably, you have to be careful not to fall for greenwashing. Otherwise you end up investing in companies that you don’t think are sustainable.

What funds are you talking about? What’s the problem with them?

We evaluated data from a fund database and looked: Which of these can I buy in Germany? Which ones say in their investment strategy that they choose sustainable companies? We took that and examined where this sustainable capital is invested and in which companies it is invested. We quickly realized that the money was not invested so differently than the capital of conventional funds.

ESG is the best-known label that exists in this area. What is it actually about?

I wouldn’t call it “Label” because it’s not defined or codified anywhere what that means. ESG simply stands for Environmental, Social and Governance. These are the three big factors that funds look at when they want to invest in particularly sustainable companies. How they do it exactly and how strict they are is up to them. Therefore, the information “ESG” should be treated with caution. It is not enough to classify whether it is really sustainable or whether you are dealing with greenwashing.

And the big problem with this story is that many people actually want to invest green and that is why more and more money is flowing into such funds?

There is a gigantic boom, the demand is huge. Since 2020 alone, the assets of sustainable funds have doubled. Of course, you then have to consider whether there are enough investment opportunities for all these sustainable funds. The central question is: How far along is the real economy on the path to transformation? I think that’s the crux of why there’s too much greenwashing. The economy just isn’t ready to meet the demand for clean investments.

But people then probably just want to take the best they can get under the circumstances.

Clear. But then you should still only sell what can keep the promise as green. If the economy is not there yet, there are fewer sustainable investment opportunities, but at the same time there is an incentive for companies to change because the financing conditions are more favorable for them when people can invest with them sustainably.

Where is the green sticker stuck? Oil companies like Shell or Exxon are in some funds – how can that be?

Spread across the different funds, all oil companies are included – and not to a small extent. They’re just investment approaches that aren’t particularly rigorous. When a fund shuts out some really bad stuff like guns or coal corporations, it leaves the door open to other things. The funds often use “best in class” approaches. That means they take an industry and pick out the most exemplary company in this industry. In the oil industry, it’s still an oil company. The problem is also that ESG ratings differ from different providers. Then a different oil company is the best.

But oil companies can’t help that they produce oil. We need that, otherwise our global economy will not function. Isn’t it understandable that people say we at least pick the best of these oil companies and reward them for wanting to reposition themselves as an energy company with wind and solar power?

That may be true in individual cases, but it is not transparent for investors. They think they’re investing sustainably, but instead in an oil company. I think you have to be honest and either say we only invest in companies that are already sustainable. Or we openly say that we also go into companies that have a problematic business model but are on the mend. And then it must also be clearly stated what improvement actually means.

You also criticize Amazon in your study, but they want to develop electronic delivery vans for their own fleet together with Rivian and, starting this year, want to dispense with plastic packaging for shipping. The criticism is not about environmental protection.

The sustainability approach with ESG is broader than climate or environment. Social issues should definitely be taken into account and investments should be made in companies that behave particularly well socially. Amazon is an extreme case because there are so many allegations that workers’ rights have been violated or unions have been suppressed. We included that as an example because an incredible amount of capital has flowed into Amazon in recent years. So writing ESG on it and investing in Amazon in a big way is a bit of a contradiction in terms. Of course you can say from a CO2 perspective that they are not the worst. But that’s too one-dimensional with ESG.

But how is that weighted? Does an oil company that’s a great place to work belong in an ESG fund?

That is the crux of these sustainability ratings, because everyone evaluates them differently and it is often not known how they are weighted. Then various factors are sometimes offset against each other and it can happen that the climate-damaging oil company, which is nice to its employees, is not rated so badly. Just like Amazon, which tramples on employee rights. But that can’t be our understanding of sustainability, that if I’m bad in one dimension and good in another, I’m so mean overall and end up in a sustainable fund.

As an investor, however, I face the problem that I want to somehow increase my money. If I have to decide, what do I have left?

Of course, if you only look at the return, it’s a different picture. It also has to be said that, on average, sustainable funds do not perform worse than conventional investments. But if someone says sustainability is important to me, that should be the main condition. There are certainly people who would rather make a difference through sustainable consumption and social commitment and simply want to achieve a nice return on their investment. This is an individual decision. Ultimately, what matters to us is that it says what’s inside.

Are there funds that really meet all of your conditions?

There are providers of sustainable investments who are very strict when it comes to the selection criteria. Of course you have to search a bit to find them, but some providers take this approach more seriously than others. But of course there is also a large gray area in which you can also find a few really bad ones. That’s a big spectrum.

One of your proposed solutions is to create a uniform label. But we can see at ESG that the label actually seems to be the problem. Especially if the EU now also wants to declare nuclear power as green under certain circumstances.

The labels that already exist are so transparent that I can read their criteria. Difficult is the large number of different approaches. The European approach to classifying sustainable economic activities is great because it creates a broad basis. It is also envisaged that funds will have to disclose which proportion corresponds to this, then I can quickly see: Okay, this fund corresponds to 40 percent with the classification, that only three percent. Then I roughly know which one is more sustainable.

But the catch, as you say, is that the EU Commission, under pressure from the member states, is making exceptions for nuclear power and fossil gas. Then it becomes absurd because she greenwashes her own standards.

It seems to be doing the same thing with the EU Disclosure Regulation. After that, you can practically call yourself “ESG” if you simply disclose the companies in which you invest. How can that be?

The idea is that you fight greenwashing by enabling people to understand why this fund calls itself “ESG” and how it intends to comply. But if this does not result in particularly sustainable funds, it rightly raises questions.

But then the circle closes at the point where we started: Someone decides what counts as “green” or “sustainable”, which the fund providers then pick up on.

The role of the financial industry is to meet the demand for sustainable investing and to do so without making false promises that are misleading. I can definitely build a fund and say: There are companies from particularly CO2-intensive sectors here, but they have promising models for transformation. Then it’s okay too. It just has to be clear what’s inside.

But what if the legislature grants these possibilities? Fund providers want to make money just like investors. And if the EU says that nuclear power can now also be green, then they will open a sustainable nuclear fund.

You’ll laugh, but there was the recent release of Urgewald and Facing Finance, who have a database in which funds can be screened for controversial investments. They have one energy fund found that actually invests in precisely such areas and calls itself green. That’s crazy.

You said earlier that there are providers who are very strict with their selection criteria. If I’m interested, where can I find out more?

For one thing, there are existing seals like that FNG seal. I can get information there, what are their criteria? If I can find that on a fund, I’ll have a clue. Then there is always the possibility of finding out for yourself, for example with the aforementioned database from Facing Finance and Urgewald. You can enter the number of the fund and all controversial investments will be listed clearly. If the fund of my choice is not included, I can read the fund’s annual and semi-annual reports with a lot of fine print to find out which companies are included. It’s a bit more work, but they’re transparent.

And as a guide, one can state that one is skeptical about ESG.

If ESG is above it, you shouldn’t be lulled by green promises, but look one level further.

Clara Pfeffer and Christian Herrmann spoke to Magdalena Senn. The conversation has been shortened and smoothed for better understanding.