German money managers according to DWS: latecomers in green investments

Frankfurt Sustainable investing is a hot topic. And not just since “greenwashing” allegations against established fund houses have been making the rounds. Practically every asset manager advertises that they will only invest more client money in investments that take ecological and social aspects and good corporate governance (ESG) into account.

If you want to know how far the providers are here, you have to look very carefully. An exclusive survey by Handelsblatt among 16 asset managers in Europe now shows that the gap is wide. Fund houses based in Scandinavia, Benelux and France are well ahead, German asset managers far behind.

For example, the Danish company Nordea Asset Management states that the proportion of sustainably managed capital in the total assets under management is 64 percent. According to official statements, 71 percent of the investment division of the French BNP Paribas, 89 percent of the Dutch Robeco. For comparison: the four large German fund houses also came up with quotas between eight and 21 percent in a Handelsblatt survey. The lowest value was given at the beginning of September by the Deutsche Bank subsidiary DWS, the highest Allianz Global Investors from Allianz.

It is true that these figures are subject to considerable uncertainty, as providers currently still have a lot of leeway as to what they classify as ESG and what not. A large energy company that is in the middle of converting from fossil fuels to renewable energies can definitely be counted among the ESG investments if it presents a credible transformation strategy.

On the other hand, there is a solid reason, especially in the Nordic countries, why asset managers are more progressive when it comes to the topic of “green” and map significantly larger volumes than German companies: social pressure is much greater.

Pension funds make the difference

At least this is the opinion of industry experts. “Environmental issues, including measures to combat climate change, have long been politically less controversial in the Nordic countries than elsewhere,” says Eric Pedersen, Head of Sustainability at the Danish asset manager Nordea Asset Management.

“There are also the large state and private pension funds that value sustainability – they are missing in Germany,” explains Roland Kölsch, an expert at the Forum for Sustainable Investments. He refers, for example, to the ethics committee of the Norwegian sovereign wealth fund, one of the largest institutional investors on the continent.

Pedersen recognizes differences in this area in individual countries. “The Swedish AP funds and the Norwegian state fund were steered in this direction directly by the governments, with the Danish pension funds the pressure came from below, from the members,” says the Nordea man. According to its own statements, the Danish company manages almost two thirds of its capital of 274 billion euros according to sustainable criteria.

The German latecomer role is surprising at first, as the German environmental movement can look back on a long tradition and the sustainability debate in this country is heavily focused on climate issues. “But politics slowed down for a long time, because we have very climate-intensive industries such as cars, steel, cement – that’s why we’re lagging behind in asset management,” explains one consultant. His assessment: “Only since we have realized that we can no longer prevent it, do we want to play at the forefront, for example to make Frankfurt a green financial location.”

Coming off the defensive

The German fund houses do not want to be declared as latecomers. For example, the head of Union Investment, Hans Joachim Reinke, emphasizes: “About three decades ago the church banks explained to us their ethical requirements for investments, so sustainability became part of our DNA.” For him, this is not a marketing gag. He has a special goal: “If we, as active investors, help turn brown companies into green, then we deliver real added value,” says Reinke.

The European Union plays a key role here with its Green Deal. The goal: to make the continent climate neutral. It expressly wants to bring the economy on a sustainable course and also involves the financial sector with specifications for ESG products.

The difference can be seen in that part of Europe that is no longer subject to regulation by Brussels: British fund houses like Schroders “cannot deliver”, as the Handelsblatt asked about sustainably managed capital. Fidelity International gives a corresponding quota of 19 percent. However, the company also does a lot of business in the EU countries, not least in Germany.

Make the world better or not?

For Europe, PwC’s strategy consultancy estimates that the investment funds managed according to sustainable criteria will jump from just under one to almost four trillion euros within five years. “The EU is stepping on the gas, so many money managers sense big business and want to be part of it,” says Christian Klein, Professor of Sustainable Finance at the University of Kassel. But this harbors the risk that providers will end up being “greener” than they actually are – see the example of DWS, which is precisely what a former employee is accused of.

And Klein sees another sticking point: “Marketing explains to investors that you can save the world with our products and even expect higher returns – that is very dangerous.”

Ex-Blackrock manager Tariq Fancy recently caused a stir with similar statements. The former ESG chief of the world’s largest asset manager said that sustainable investing is of no use because it does not fight climate change in the real world. The thought: If you buy shares in an electric car manufacturer like Tesla instead of shares in an oil company, you have done nothing to reduce greenhouse gas emissions.

In extreme cases, a major investor would have to do exactly the opposite of what can be expected, i.e. buy the shares of the oil company in order to then change the business model in a greener direction as a co-owner. This approach is known in the financial sector as impact investing.

Professor Klein sees it similarly: “Some providers sell sustainability as an impact.” But that is at least a starting point. “Do not cause any more damage with the securities investments, a sustainable fund is good for that.” The scientist also relies on an indirect effect on the real economy: A green investment boom strengthens companies’ sustainable thinking.

Fuzzy terminology is a problem

The problem in the whole debate, according to scientists, is the vagueness of the term. When in doubt, each provider understands something different. For some people, the exclusion of controversial business activities such as weapons, tobacco, fossil energy is enough for a green paint job. Others seek out the relatively best addresses in each industry based on sustainability criteria. Still others rely on dialogues with companies or expressly focus on sustainable business areas such as clean energies and e-mobility.

In addition, there are various regulatory initiatives of the European Union, which also raise questions of content. “We’re talking about three big building blocks, it’s a jungle that every provider has to fight their way through first,” says Simon Klein, ESG expert at Pictet Asset Management. He goes even further: “This is complicated and difficult to understand, even for experts.”

Three building blocks of regulation

First of all, it is about the so-called EU taxonomy. With it, the Commission defines sustainable economic activities. The results on the climate issue are available, the specifications for the other environmental issues, those for social aspects and company organization will follow. The second component is the Disclosure Ordinance, which has been in force since March.

According to this, fund providers, for example, have to assign their products to three categories: those without, those with sustainability requirements and those with the intention of making an impact. In addition, there will be new guidelines for investment advisors from summer next year. They then have to actively ask their customers whether they are interested in sustainability and, if so, base their product suggestions on specific requirements.

At the moment, the industry is busy assigning its products to the two important categories according to the Disclosure Ordinance. “By the end of the year we will raise our equity funds for Asia and emerging countries to sustainable levels,” says Pictet-Mann Klein, for example. According to data from Scope Analysis, around one in five of the approximately 12,000 funds on offer in Germany was labeled as sustainable by the middle of the year, a far smaller proportion as impact-oriented.

Pictet man Frank, for example, expects increasing demand from investors and an ever larger supply of investors. For him it is clear: “As in the last two decades with the exchange-traded index funds, we will also see a long-term upturn in sustainability products.”

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