Sustainability Blog

“Sustainvestment”? Fund Managers Must Query Sustainability of Investments

By Apurva Gosalia - Aug 04, 2022

Investing money and doing good at the same time isn’t so easy. Terms such as “green,” “sustainable” or “climate friendly” are not protected. Since August 2, new European Union guidelines are intended to provide more clarity, compelling fund managers to look at the sustainability of their investments.

Green investments are booming in Europe, and Germany in particular. Europe accounts for 80% of inflows into the sector, according to analysts at Morningstar. From Germany alone, that’s a total of more than €130 billion. In the past year, private investors in Europe’s largest economy have tripled their investments that are considered sustainable. 

The deputy managing director of the German Protection Association for Securities Ownership, Jella Benner-Heinacher, notes the growing interest in green investments, but she advises caution. 

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“Unfortunately, there are still no really precise minimum standards, and there’s also no real label yet that says: it’s sustainable, i.e., green.” As a result, “a lot of things are sold as green that are actually classic products,” she says.

Making returns with a clear conscience by putting money into sustainable funds is the dream of many investors. This is precisely where the EU Commission wants to bring light into the darkness with a series of regulations. 

Under the abbreviation “Mifid II,” new directives have been gradually coming into force since 2018, which are intended to make securities sales more transparent and the financial system more sustainable at the same time.

On Tuesday this week, another part of this reform program went into effect. From now on, financial advisors must explicitly ask investors whether they want to invest their money sustainably. But even here, pitfalls lurk, believes investment strategist Christian Kahler of the private asset management firm Kahler & Kurz Capital.

“We know these processes: There are 20 to 30 pages of fine print handed out. In the end, the customer still has to sign, and there is always the danger that in detail not everything is read so carefully after all,” Kahler said.

Consumer protectors advise anyway that investors should inform themselves about the main business of the company or fund, because some providers renounce investments in coal or weapons, but invest predominantly in highly controversial industries such as nuclear power. The EU taxonomy, with its catalog for climate-friendly investments, is intended to help investors classify their investments. 

However, it also recognizes investments in gas and nuclear power as climate-friendly. This caused some criticism in the run-up. Benner-Heinacher considers it therefore crucial that investors themselves think in advance, which criteria are important to them with the investment of funds.

“Most investors who contact us also want to achieve something with their investments,” she said.

Kahler thinks the idea of sustainable investments is a good one, but, “You should still look very carefully and, very importantly, not lose sight of costs, returns and risk. After all, sustainable does not mean without risk and without costs.”

All these points cannot be weighed up in general terms, according to the experts. Especially since some non-governmental organizations found in studies of sustainable funds that their composition hardly differs from conventional funds. Even oil companies with poor environmental records worthy of criticism were included in so-called sustainability funds.

However, with a clear, straight and prudent sustainability strategy in place, even listed lubricant players might be interesting add-ons for investors in their sustainability fund portfolios.The bottom line is that investors need to look closely at how sustainable the companies or funds they want to invest in actually are.

STAY SuSTAYnable!

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