The parliament of the German state of Baden-Württemberg has passed a law to invest assets worth €17bn, including pensions money, according to ESG criteria.
The largest part of the sum invested according to sustainability standards, and totaling €10bn, comes from the state’s pension fund, according to reports.
The new Law for Sustainable Financial Investments points to the framework defined by the 17 Sustainable Development Goals of the United Nations, the EU taxonomy and the Paris Agreement to invest the assets.
The rules are designed not only to prevent investment decisions from contradicting global sustainability goals, but also to create incentives for companies to contribute to protect the climate.
The assets are invested in bonds and equities of companies generating high revenues through sustainable economic activities according to the EU taxonomy, and in companies contributing to cutting greenhouse gas emissions (GHG) to reach targets set by the Paris Agreement.
GHG emissions should decrease by at least 7% on average per year, and should be at least 50% lower than the GHG emissions intensity or the absolute GHG emissions of the underlying investment universe, according to the law.
Companies hindering the achievement of one or more sustainability goals, or one or more of the six environmental objectives set by the European Union through the taxonomy are excluded from the pool of investments.
Further exclusions include: companies investing in coal; manufacturers of certain types of weapons systems or key components for weapons systems – for example, biological and chemical weapons, anti-personnel mines, cluster munitions, and nuclear weapons; nuclear energy producers; producers of genetically modified seeds or organisms (green genetic engineering); and companies involved in the production of tobacco.
The assets are not invested in companies generating: 1% or more of their revenues from the exploration, mining, production, sale or refinement of brown coal; 10% or more from the exploration, production, distribution or refinement of oil; 50% or more from the exploration, extraction, manufacturing or sale of gaseous fossil fuels; and 50% or more from generating electricity through GHG emissions intensity of more than 100g carbon dioxide equivalents per kilowatt hour, according to the law.
Investments are waived in states or regional authorities of states not protecting political and civil rights, that are corrupt, and that have not ratified human rights treaties signed by the German government, or weapons systems conventions.
The state of Baden-Württemberg said it expects a positive impact on returns on investments through the transition to a greener economy as the market gradually prices in sustainability risks, and the financial flows towards sustainable investments lead to higher returns.
The higher demand for sustainable investments in the past 10 years has already improved returns also for the allocations made by the state pension fund, it added.
The pension assets of the public funds have been invested in sustainable equity indices since 2019, following an amendment to the law on the guidelines for the management of assets.