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Frankfurt am Main | 11.12.2017

Sustainable investment doesn't mean lower returns

Joachim Wuermeling delivering his speech at the first Bundesbank Portfolio Day [+] Joachim Wuermeling
Bundesbank Executive Board member Joachim Wuermeling came out in favour of developing sustainability standards for the investment of public funds in Germany. "Standards of that kind wouldn't just be good for portfolio management; they would undoubtedly also send a clear message to a wider audience that sustainable investing is worthwhile." Mr Wuermeling went on to highlight the Bundesbank’s availability to mediate and facilitate this process. He argued that there is a sound economic rationale for investing sustainably. Sustainable investment, he observed, "is not a ‘green cherry on the cake’ for those who can afford it."

The Bundesbank manages portfolios on behalf of its clients by allocating their assets to suit to their particular investment strategies. Clients include not just Germany's federal states but the Federal Republic of Germany as well. The Bank draws on its market expertise to advise its client base but does not make any investment decisions itself. For some public sector clients, it has been implementing sustainable investment strategies since as far back as 2007.

The Bundesbank’s inaugural Portfolio Day invited representatives from Germany’s federal states and central government to discuss how the forward-looking topic of sustainable investment can be brought to a wider audience in Germany. Participants debated how the three traditional parameters of investment – return, safety and liquidity – can be expanded to include environmental, social or corporate governance aspects.

Not an either-or question

Another proponent of common standards was Werner Schnappauf, a member of the German Council for Sustainable Development, who in his speech urged Germany to seize the opportunity to establish standards voluntarily before regulators impose them from above. Casting his sights to other European countries which are already well ahead of Germany in the sustainability stakes, Mr Schnappauf said, "Now is the perfect time to follow suit by switching to a sustainable fiscal policy."

For all the diversity in products and eagerness to innovate in the bond market, this is a field where a wealth of potential still remains untapped, Manuel Cseh, a portfolio manager at the Bundesbank, remarked. He noted that supply often lagged far behind demand, giving potential new issuers an opportunity to turn this situation to their advantage.

David Döhrmann at the first Bundesbank Portfolio Day [+] David Döhrmann David Döhrmann, a portfolio analyst at the Bundesbank, used his speech to emphasise that sustainability does not necessarily mean lower returns. He used a comparison of sustainable and conventional equity indices to explain that sustainable indices can perform just as well, if not better, than their conventional counterparts. "Investing sustainably isn't an either-or question."

Alexander Bassen at the first Bundesbank Portfolio Day [+] Alexander Bassen This line of thinking was echoed by Professor Alexander Bassen from the University of Hamburg who, like Mr Schnappauf, is a member of the German Council for Sustainable Development. Mr Bassen presented an analysis of around 2,000 studies which explored whether sustainability impacts positively or negatively on business performance. The finding, much to his surprise, was that roughly every second study analysed identifies a positive correlation between sustainability and financial success; 90% are at least unable to ascertain any negative correlation.

Sustainability not yet commonplace

And yet sustainability is still not commonplace in Germany's financial sector, Mr Bassen observed, pointing to the clear lead which France, the Netherlands, Switzerland, and even the UK enjoy over Germany both in terms of assets under management and strategy choice. "This is a field where Germany is still lagging behind its European peers," he concluded.

Jens Spahn and Joachim Wuermeling at the first Bundesbank Portfolio Day [+] Von links: Jens Spahn und Joachim Wuermeling Jens Spahn, State Secretary at Germany’s Federal Ministry of Finance, countered Mr Bassen’s observations by citing a host of initiatives in which Germany is already a stakeholder in the area of green finance. One of these is the fund established in 2017 to finance the disposal of nuclear waste. Sustainable investments played an important role in the development of an investment strategy for this fund, Mr Spahn argued. He also highlighted the strong commitment of the Kreditanstalt für Wiederaufbau (KfW) to the topic of green finance, noting that KfW had provided more than €250 billion in funding for environmental and climate protection projects over the past ten years and was also a major player in the green bonds market, both as an investor and as an issuer.

Don't make government’s investment decisions a political matter

What is needed now, Mr Spahn continued, is a discussion on whether there is any great appetite or desire for politicians to have a say in public sector investment decisions. "When it comes down to it, any decision to invest sustainably is invariably a value judgement," he reasoned, noting that, while everyone would generally agree that sustainability should play a role in the investment of public funds, things are often less cut and dried in practice. Climate protection, in particular, is often a highly contentious topic, he said, adding, "The key issue is this: how far should the investment decisions made by government and those entrusted with the management of public assets be a political matter?"

Guest contribution by Joachim Wuermeling in "Die ZEIT"

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