German institutional investors show greater support for ESG
Union Investment’s sustainability survey found that conviction over the importance of ESG factors has overtaken regulation as the main driver for sustainable investing in Germany.
More than 80 per cent of institutional investors in Germany take sustainability criteria into account in their investment decisions, with respondents citing their own convictions as the biggest driver, ahead of regulation, for the first time since Frankfurt-based asset manager Union Investment launched its investor survey in 2010.
Out of the 203 institutional investors surveyed, 21 per cent said their convictions were behind ESG investments and 14 per cent named regulatory requirements as a driver. Combined, respondents manager around €5tn of assets.
“Investor attitudes are changing. Sustainability is now an integral part of their investment strategy, instead of being something of a box-ticking exercise as before,” says André Haagmann, the Union Investment’s board member responsible for institutional clients.
However, Oakbridge director of funds Alex Smyth says that financial regulation is having a key role in shaping the sustainable investment. He singles out rules on ESG ratings.
“A regulatory framework for ESG ratings would improve their reliability and accuracy, which will help with investment selection processes,” said Smyth. “Institutional investors with specific sustainability goals look to ESG ratings to aid their decisions in portfolio rebalancing and risk management.”
Further, despite citing the importance of regulation, respondents to the survey admitted they have gaps in their regulatory knowledge, with less than half of those surveyed aware of the EU’s Sustainable Finance Disclosure Regulation.
Of those surveyed, 40 per cent indicated they knew the SFDR regulation well, while 9 per cent reported having only a rudimentary understanding.
SFDR is just one example of regulations being introduced by policymakers in various jurisdictions to standardise ESG definitions and tackle concerns about greenwashing. Most recently, Germany’s DWS came under scrutiny from regulators over allegations of providing misleading information about ‘green’ investments.
Rules for classifying investment funds as sustainable ground to a halt in Germany earlier this year after the financial regulator, BaFin, shelved plans due to geopolitical uncertainty.
Aware of the regulatory challenges, the European Securities and Markets Authority issued a supervisory briefing in May to outline the approach it expects national financial regulators in the EU to take on when supervising investment funds with sustainability features.
A shift towards ESG
Union Investments’ survey found that the proportion of institutional investors investing sustainably increased by 5 percentage points compared to its 2021 survey, and by 18 percentage points compared to 2018.
As sustainable investments become increasingly prevalent, Union Investment noted a change in investors’ attitude towards them. According to the German asset manager, positive experiences in the field are likely to have played a big part in persuading investors of the merits of sustainable investment.
Smyth also identified that investor groups have generally welcomed new ESG proposals and it is thought that some institutional investors will encourage fund managers to voluntarily early adopt standards.
The majority (69 per cent) of the institutional investors surveyed said their sustainable portfolios delivered similar or even superior returns to their conventional portfolios, while 5 per cent said their sustainable portfolios trailed behind.
Institutional investors also remained optimistic about future growth in the market, with 85 per cent of them expecting to see a further increase in the volume of sustainably managed investments over the next 12 months.