German investors put corruption on top of the list of exclusion criteria to deploy sustainable investments, according to a study conducted by the Forum Nachhaltige Geldanlagen (FNG), the industry association promoting sustainable investment in Germany, Austria and Switzerland.
“To determine the level of corruption of a company, it is important that a firm has an anti-corruption policy in place and a code of conduct that is clearly communicated to the employees,” Angela McClellan, FNG’s chief executive officer, told IPE.
It is critical not only to use the code of conduct and to list violations, but also that breaking rules has consequences, she added.
“Corruption relates to the governance and points at how important the leadership and governance of a company is for its sustainability performance,” she said.
Sustainable investment strategies are still mostly based on exclusion criteria, used by 99% of funds and mandates.
Standards-based screening applies to almost 95% of sustainable funds and mandates, and environmental, social, and governance (ESG) integration to 79% of the assets in funds and mandates, an almost 10% increase in 2019 compared to the previous year.
ESG integration is already an integral part of the strategy for most asset managers. It covers a large part of the classic investment universe and is well anchored in the analysis processes.
According to the study, based on a survey of asset managers in German-speaking countries with total assets of €2trn, institutional investors represented the largest share of cash deployed in sustainable funds and mandates with €154bn, up 27% in 2019 compared to the prior year.
The demand for green investments from private investors, however, rose strongly by 96% last year to €18.3bn.
McClellan said: “We believe that this trend of sustainable investments by private investors will continue” because EU rules requiring investors to ask their clients about sustainable investments will apply from mid next year.
She added that institutional investors still have a share of 89% of the demand for sustainable investments.
“We believe that this trend of sustainable investments by private investors will continue”
Angela McClellan, FNG’s CEO
Among institutional investors, church institutions and charities took 26.7% of the share of the pie in 2019, down from 40% in 2018, followed by insurance companies and mutual associations with 18.6%, the public sector with 16.6% and public Pensionsfonds with 12.8%.
The five largest asset manager firms handle 77% of all sustainable assets in Germany, and many smaller financial service providers, some specialised in sustainability, share the rest of the market.
The majority of investments are in equities, corporate bonds and government bonds, while 7% is in alternative investment products such as liquid assets or real estate.
The study calculated that in Germany sustainable investments grew by 23% in 2019 to €263.3bn, including €120.3bn in mandates (+36%) and €63.2bn throguh investment funds, up 41% compared to 2018.
For the German Investment and Asset Management association (BVI), the total volume of funds and mandates in Germany reached €3.4trn as of December 2019, a 15% growth compared to 2018.
The sustainable investment market rose twice as fast at 37%, with a share of sustainable funds and mandates of around 5.4% of the total fund market, a 0.9% growth compared to the previous year.
“In Germany, sustainable investments have grown constantly,” said McClellan.
She added that the most important driver of sustainable investments is in particular the EU regulatory framework.
“All the players in the finance market have to disclose how they deal with sustainability risks, and this is also an aspect that drives sustainable investments, in particular for responsible investments,” she said.
McClellan believes that the coronavirus crisis “leads to thinking about how to include sustainable finance criteria in the public aid packages to support the economy and to set the course for the future.”
FNG differentiates between sustainable investments, where ESG criteria are applied at product level, and responsible investments, where the ESG criteria are defined at the institutional level, she explained.
Responsible investments progressed by €114bn, or 7% growth, to over €1.6trn in 2019 compared to the previous year.
ESG integration is the prevalent investment strategy for responsible investments, applying to 95% of responsibly managed assets, according to the study.