ESG – Two sides of one coin
Everyone is talking about ESG. It stands for Environmental Social Governance. Simply stated, ESG describes responsible corporate action with the aim of contributing to sustainable development that goes beyond regulatory requirements. For us, that means that we consider ESG from two different perspectives: on the one hand, from the view of our own corporate philosophy, and on the other hand, with regard to the asset management and investment advice that we provide.
Sustainability and conserving ecological resources including fair living conditions is a central topic for us on which we place great value. A long-term, sustainable return can only be achieved when the living conditions remain unchanged for future generations. For this reason, as part of the financial economy, we consider it our special responsibility to actively promote climate protection goals with the funds from financial investments and thereby contribute to a more sustainable economy. We are aware that immaterial values such as the environment, nature, authenticity, community and purpose are gaining significance in many areas of life. The continuing pandemic and the war in Ukraine give this trend greater updraft. ESG is gaining in significance as a result. It must not be a means to an end that outwardly flaunts taking on social and economic responsibility. Rather, it is a fundamental component of long-term business success.
Considering the above-mentioned trend, it is no wonder that long-term financial investments continue to gain in significance and momentum. European regulations are considered a central driving force, initiated in 2018 by the EU Action Plan Financing Sustainable Growth,, also known as sustainable finance. The intent is to assist the EU economy in the transition to a more environmentally-friendly and robust closed loop economy. At the start of 2022, the taxonomy of the European Union (EU) entered into force in sections. It is an instrument that helps classify company activities with regard to whether these companies make a “green” contribution. Based on these guidelines, investors should be able assess whether a company in which they want to invest is working sustainably. An EU commission has specified clear criteria for this with very specific measured variables. Article 10 Para 2 of the Taxonomy Ordinance which regulates how certain nuclear energy and gas operations also contribute as transitional activities toward climate neutrality, nuclear security and global security, and to the transition from coal to renewable energies is the subject of particular controversy.
However, there is in fact increased demand from private investors and continued high demand from institutional investors. The FNG – Forum for Sustainable Financial Investments [Forum Nachhaltige Geldanlage] – indicated in its 2021 market report a growth rate of 117% for private investments in sustainable funds. The share of sustainable funds and mandates in the German total funds market is currently at 6.4%, and study participants estimate growth of 71%.
The supply is correspondingly large. Investors can select between exchange-traded funds (ETF), fixed-term deposit accounts from a sustainable bank, or invest directly in renewable energies. Our task as an investment consulting firm is to develop products that correspond with the values of our clients. In addition to the traditional criteria of profitability, liquidity, and security, the environmental aspects (E), social aspects (S), and responsible corporate management (G) are also considered.
Currently there are still no official standards for when a stock or bond is considered to be sustainable. Therefore, we take the ESG risks into account first and foremost when selecting the financial instruments that we recommend. Issuers of securities are analysed as a whole, meaning in an expanded context. Sub-aspects include energy management, water risks and impacts, equal opportunity, supply chain management, corporate ethics and remuneration. For the sustainability evaluation of individual securities (stocks, bonds), we refer to the sustainability research done by ISS-ESG. ISS-ESG offers ESG research and ratings for companies and countries, and makes it possible to identify material, social and ecological opportunities and risks.
The financial market is currently in a phase in which the sustainability effectiveness, also referred to as impact, is not yet measurable in terms of quality and quantity. This often results in uncertainty on the part of the investor. Nevertheless, the topic has caught on in business finance and is trending. The path to clear, standardised definitions and empirical values in the practical implementation is admittedly still a long one.
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