Investing with a good conscience: The ethical fund trend in Germany

There is virtually no interest on call money, and government bonds provide meagre returns. At the same time share prices are rising apparently inexorably, forcing investors to consider whether to put their money into the stock exchange. However, for many in Germany this form of investment has a poor reputation, with concerns about the ethical standards of the listed companies.

Many reject the idea of profit at any price, for example in the arms trade, tobacco, genetic engineering technology or the fossil energy sector with its consequences for global warming.
The trend towards socially responsible investment in the financial markets is gathering steam. Where they were once seen as a niche sector for do-gooders, the green sustainability wave is now making an impact on the hard-headed financial world.
Part of the reason is that the big names have broken the ice. Allianz, one of the world’s largest insurers and asset managers, long ago divested from firms making most of their turnover from coal.
France’s BNP Paribas, one of the largest banks in the world, no longer provides funding for the exploitation of shale oil or tar sands. Deutsche Bank does not finance coal-fired power stations. And Norway’s sovereign wealth fund, the world’s largest, avoids armaments and tobacco in its investments.
Political pressure is also rising. At the UN’s Bonn Climate Conference last year, several countries agreed to exit-coal-fired power.
And the workings of the stock exchange are having their effect. Shares in the automotive and fossil fuel sectors trade at a discount, because investors do not have complete faith in the transition from the combustion engine to electrical power and fear stricter regulations on CO2 emissions.
“Sustainable investment has become mainstream among the big investors,” in the view of Ingo Speich, a fund manager at Union Investment, a pioneer in the area.
Charitable motives are not always the main driver in sustainable investment. The diesel scandal at Volkswagen caused the company’s share price to dive and led many in the market to rethink their exposures, Speich says.
“It showed that sound company management and clean business pay off in the long run.”
An increasing number of major investors aim to minimise the risks of legal action through sustainable investment, avoiding nuclear energy and tobacco, for example.
Portfolios are being filtered according to sustainability criteria with the aim of identifying possible dangers, while fund managers also seek to improve their image with a green sheen.
Private investors also have increasing options for “clean” investment. According to analysts Scope, in Germany the range of sustainable funds has risen to more than 430. In 2015 alone, 90 new funds were added, most of them share-based.
Among the criteria for these ethical funds are the environment, social responsibility and sound company management — encapsulated in the term ESG investing: environmental, social and corporate governance.
Most of these funds avoid companies engaged in the manufacture or selling of armaments, followed by tobacco and alcohol. Nuclear power is also on this list.
Companies seen as violating good labour practice or human rights, engaging in genetic engineering or profiting from pornography also end up proscribed.
Other funds seek out the best in a particular sector with respect to the environment or corporate social responsibility (CSR).
The private investment sector is still small. Germany’s public funds administer more than 1 trillion euros ($1.2 trillion), although just 18 billion euros are invested in funds seen as sustainable, less than 2 per cent.
But the trend is upwards. “ESG investments are gaining ground,” says Michael Lewis, who heads research into sustainable investment at Deutsche Bank’s fund management subsidiary.
Sustainable development does not mean low yields, despite impressions in certain quarters. According to a study by Scope, over a three-year period there were scarcely any differences between traditional and “clean” share-based funds.
In fact, the sustainable funds secured slightly higher returns. “It is not the case that investors have to choose between a good conscience and yield,” it found.
A 2014 study by the University of Kassel in Germany came to a similar conclusion. It examined 35 analyses on the performance of sustainable funds compared with traditional investments.
In 15 no difference could be discerned, in six the sustainable funds performed worse, and in 14 better.
Nevertheless investors should not put their faith blindly in funds with the sustainable label. “There are no reliable legal standards for ethical-environmental funds,” the official consumer advice centre in the state of Bremen says.
Investors must do their own research into where to put their money ethically. — dpa

Alexander Sturm