German institutional investors have continued to warm to the idea of sustainable investment this year, according to the sentiment index for sustainable investment, created by Union Investment in collaboration with Professor Henry Schäfer of the University of Stuttgart.
The index has increased by 1.9 points year-on-year to reach 19.4 points, while the proportion of institutional investors using sustainable investment strategies grew by 4 percentage points to 64 per cent.
This sentiment index is based on data collected in an annual survey among institutional investors on various aspects of sustainable investment, conducted by Union Investment. The scale of the index ranges from -100 to +100. This year, 204 institutional investors, including insurance companies, pension funds, banks, corporations, charities and trusts with total assets under management of nearly EUR5 trillion took part in this survey.
From a figure of just +5.4 points in 2013, the sentiment index has made steady progress over recent years and has now reached nearly +20 points.
For Alexander Schindler, the board member responsible for institutional clients at Union Investment, this is a clear signal: “Sustainable investments are no longer just a fig leaf. For many investors, they have become part of the regular business.”
This assessment is reflected in the fact that 64 per cent of investors use sustainable investment strategies. Just five years ago, this figure had been much lower, at 48 per cent.
There is plenty of room for improvement. The lack of transparency of the strategies on offer was named as the strongest point of criticism (62 per cent), followed by insufficient representation of the required risk/return profile and the limited investment universe (51 per cent).
“In future, providers will need to match investors’ requirements even more closely and offer more transparency,” says Schindler.
Giving up on sustainable investment is something that
77 per cent of the surveyed institutional investors would no longer even consider.
In the early years, debates around sustainable investment were dominated by ethical, social and ecological arguments, but over time there has been an increasing focus on the economic dimension. In 2013, only 42 per cent of the survey participants named financial aspects as an important factor, whereas 64 per cent of investors saw them as a primary factor in the latest survey.
“Sustainability has evolved from a soft investment criterion into a hard investment criterion for portfolio management purposes,” explains Schindler. “This change has promoted the professionalisation of the sustainable investment sector.”
Another significant shift can be seen in the allocation of assets in sustainable investments, as bonds are no longer the dominant asset class in this sector. In 2013, bonds still accounted for 45 per cent of all sustainable investments. In the most recent survey, their share had dropped to 30 per cent. By comparison, equities have gained a lot of ground, making their way from just 14 per cent five years ago to 30 per cent in the latest survey. Bonds and equities are therefore the preferred asset classes for sustainable strategies, followed by real estate (22 per cent) and infrastructure (8 per cent).
“Looking at the overall portfolio, there is still a lot of upward potential for German investors with regard to sustainable investment,” Professor Schäfer says. “Only 37 per cent of their assets are currently invested sustainably.”
The Paris climate change conference held in November 2015 has also had a noticeable impact on sustainable investment by institutional investors, albeit with a certain time lag. In 2016, only 21 per cent of sustainability-oriented investors had considered climate change in their investment policies. By 2017, their number had grown to 43 per cent.
Schindler expects this trend to continue: “Across all sectors of the economy, climate change has a serious impact on business models and earnings prospects. Investors can no longer afford to ignore climate change risks in their portfolio.”
Pressure on institutional investors is already starting to build up. Under a directive passed by the European Parliament in November 2016, company pension funds have to consider environmental, social and governance criteria as well as climate risks in the investment of the funds they manage. Changing regulatory requirements have therefore become by far the most important factor behind the engagement of institutional investors with the topic of sustainability. This observation was confirmed by 52 per cent of all respondents, compared to just 32 per cent in 2013.
“However, it seems that these tighter regulatory requirements for pension schemes have not been expanded to the wider investment environment,” says Schäfer. “This could make it more difficult to achieve a systematic implementation of sustainable investments.”
At the same time, many investors do not appear to be familiar with a number of relevant aspects around sustainability. 67 per cent of institutional investors know little or nothing about the United Nations’ Sustainable Development Goals and only one in five considers these goals when making decisions about sustainable investment. Likewise, only 20 per cent of institutional investors confirmed having information about the climate footprint of their portfolio.
“Sustainable investment is becoming increasingly complex. In view of this fact, it is the responsibility of the asset management sector to provide customers with the appropriate tools,” notes Schindler. “The CO2 intensity of individual portfolios, for example, has become much easier to measure than in the past.”
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