Investing money sustainably

Many people are fundamentally concerned about the future of our planet. Nevertheless, for many years there was a huge gap between the desire for sustainable change and actual action; and this is especially true when investing money.

In order to increasingly steer capital flows towards sustainable investment and thereby promote sustainable corporate governance, the European Commission launched an Action Plan on Sustainable Finance in 2018. This stipulates, among other things, that in the future, intermediaries will have to explicitly consider the sustainability preferences of their customers when providing financial advice. Therefore, they must be able to offer a suitable selection of sustainable investment funds.

For customers, the question arises as to whether to invest in sustainable funds and at the same time also generate a sufficient return.

what does Sustainability mean?

The concept of sustainability in today’s sense was first used in 1713 by Hans Carl von Carlowitz in his work on the timber industry. Then as now, sustainable management is combined with the gentle handling of raw materials. His statement was that we should not cut more trees than we could replenish through planned new growth. The aim was, and is, the long-term preservation of our environment in order to preserve the livelihoods of future generations.

In recent decades, the definition of “sustainability” has been extended to include social impacts on the business environment (e.g. fair dealings with employees, customers and suppliers) as well as sound principles of responsible corporate governance (including compliance with laws and regulations).

What does ESG mean?

As an abbreviation of three English terms, ESG summarizes the cornerstones of sustainable investing: Environmental, Social (social compatibility) and Governance (responsible corporate governance). In the meantime, ESG is used as a common abbreviation for the different aspects of sustainability. There is still no uniform definition for these three individual dimensions, nor for the overarching concept of sustainability or sustainable investment. The different interpretations open a wide range of different ESG investment styles for investors, but also make it difficult for them to orientate themselves in the available offering.

What is a sustainable investment?

Sustainable investments are increasingly becoming the focus of investors. It is no longer only the expected return of an investment that is the motivator for investments, but it is also increasingly important how these returns are generated.

As early as 2006, an investor initiative supported by the UN developed the voluntary code of conduct of the UN Principles for Responsible Investing (UN PRI), to which an increasing number of companies in the financial industry have since joined. The signatories commit to taking ESG criteria into account in their investment processes. How this is considered can be defined by the respective company itself – the spectrum is therefore very wide. It starts with “responsible investing”, i.e. when selecting investments, in addition to financial criteria, the ESG criteria are systematically included in the investment processes.

The strongest form of sustainable investing is so-called “impact investing”. This aims to achieve measurable positive effects on the environment or society with an investment, at the same time as generating a positive financial return. With sustainable investment, goals can also be pursued that go beyond the pure idea of financial returns.

Special quality standards, such as sustainability ratings or sustainability labels, offer a possible guidance in the variety of sustainable investment styles offered. In the German-speaking countries, the seal of the Forum sustainable investments, or FNG seal, has prevailed as a quality standard for sustainable investment funds. Once purchased, this seal must be confirmed annually with each fund. The aim of the award-winning funds is to ensure that the sustainability criteria are considered in the investment on a permanent basis.

An increasing number of companies in society are now taking sustainability criteria into account in their economic activities. On the one hand, this is done out of conviction. On the other hand, there is increasing pressure from their own investors to adopt a sustainable profile. This is partly because financial investors are increasingly taking sustainability criteria into account in their own investment processes, regularly interviewing their portfolio managers and measuring them based on appropriate criteria. Companies depend on easy access to capital. The inclusion of sustainability criteria in their corporate policy can help in obtaining this.

One of the objectives of the European Commission’s action plan is to develop a single classification framework (“taxonomy”) to define over time which business activities the EU considers sustainable. Financial actors can then use this framework as a “guide” to develop sustainable financial products. In addition, a commitment to greater transparency regarding the sustainability criteria in the investment process is being discussed.

Worldwide, the share of sustainably invested funds as well as the fundamental interest in this topic is constantly increasing. This attention can lead to an increasing demand for equities and bonds from sustainable companies and could also be driven by an increasing number of newly launched sustainability funds. As a result, a sound sustainability profile could lead to increasing demand for these companies, thus driving the prices of their shares upwards.

It is often difficult to navigate the wide range of sustainability products, the sound definition of personally relevant sustainability criteria as well as the resulting limitations of the investment universe. The complexity of this process becomes a core challenge. If sustainability criteria are chosen too restrictively – for example, in terms of the choice of states and sectors – the investment universe may shrink considerably. This could make it more difficult to spread the investment widely.

What are sustainable equities and fixed-income securities?

Public limited companies that are based on sustainability criteria can be described as sustainable companies and their issued shares as sustainable shares.

However, the lack of a uniform definition of “sustainability” makes it difficult for investors to find guidance without a deeper analysis. It is important to ensure that sustainability is not only used as a marketing attribute. The so-called “green washing” could otherwise lead to the fact that companies that operate sustainably are difficult to distinguish from those simply marketed as sustainable.

This also applies to fixed-income securities and “Green Bonds”, which are intended to finance specific climate-friendly projects.

Investment funds facilitate sustainable investment, especially for retail investors who want to put together a broad investment portfolio. As with traditional funds, the management of these funds is based on administrative costs, which include, among other things, the costs for auditing the sustainability of portfolio managers in the case of sustainability funds.

There are now various rating agencies that analyse sustainability profiles of investment funds (e.g. Morningstar ,yourSRI).

Companies are ranked based on these criteria, and from this, top 50 values for the index are selected. Every three months, the composition of the DAX 50 ESG is reviewed by Deutsche Börse. If one of the 50 companies no longer meet the selection criteria sufficiently, it will be removed, and another company will be included in DAX 50 ESG. It is important for companies to belong to a relevant index. Among other things, it can also improve the company’s financing options.

The SIMTAL view

At SIMTAL we embrace sustainable investment. Therefore, within the framework of the unit-linked insurance products which are integrated in our platform, we exclusively offer sustainable investment strategies and sustainable investment funds.

The “magic triangle of investment” with its three goals of security, return and availability becomes a “magic square of investment” through the expansion to include the goal of sustainability. Unlike the three traditional conflicting objectives, sustainability is not fundamentally at odds with them. Taking ESG criteria into account in the investment, can help in avoiding risks and even contribute to a better risk-return ratio in the long term. However, like any other investment in the capital market, sustainable investments carry risks of loss of assets up to total default.

SIMTAL is convinced that a sustainable investment is worthwhile. Reputational and legal risks in the investments are avoided and this makes corresponding setbacks in the return less frequent. Consumers are more likely in the long term, to select products from companies that take sustainability criteria into account in the production.

In addition, adherence to the ESG criteria also enhances the feel-good effect of having supported a company that has contributed to the preservation of life.

For these reasons, SIMTAL’s fund universe only includes funds and strategies that meet the Morningstar sustainability rating criteria when they are included and have received at least 4 globes.

In addition, all funds that are included in the fund universe for the first time should have a good quality rating from an independent agency (Morningstar rating of at least 4 stars). Should a fund lose its good quality rating or ESG rating over time, SIMTAL will put pressure on the insurance companies in order to remove the fund from the fund universe as soon as possible.

Neither the employees nor the sales partners of SIMTAL receive commissions or bonuses or any other remunerations that are dependent on the fund selection made in the consultation with the customer.