The EU Commission wants to declare nuclear power and natural gas sustainable. My colleague Wolfgang Stieler has already commented on what that means from an energy policy perspective. I would like to shed light on another aspect here: the consequences for “green” investments.
The idea behind the so-called “taxonomy” is to create a kind of eco-label for investments. Such a seal is urgently needed, because if you try to invest your money in a reasonably harmless and still profitable way, you will quickly find yourself in a tangle of lack of transparency and conflicting goals.
It starts with outlining the term “sustainable”. The acronym “ESG” has established itself in the financial sector: Environmental, Social, Governance. Among other things, this means that the companies in question should not only operate in an environmentally friendly manner, but should also treat their employees properly and take action against corruption. So it is important to bring a lot under one roof.
Gregor Honsel has been the TR editor since 2006. He believes that many complex problems have simple, easy-to-understand, but wrong solutions.
Funds pick out the most sustainable industries
This results in a conflict of objectives: the closer you define these criteria, the fewer companies that remain. A broad diversification is, however, advisors preach time and again, the be-all and end-all of a robust financial investment. That is why funds often try to strike a balancing act between breadth and sustainability: They exclude certain sectors – such as gambling and armaments – and pick out of all other sectors the companies that they consider to be the most sustainable. However, this “best in class” approach can lead to mineral oil companies also appearing in alleged sustainability funds. In addition, there is little agreement about the best-in-class rating. For example, practically every major food manufacturer – whether Nestlé or Danone, whether Pepsi or Coca Cola – can be found in any ESG fund.
If, on the other hand, funds only focus on certain sectors – such as renewable energies – these are extremely volatile and dependent on the economy. For this, investors need strong nerves.
To make matters worse, it is difficult to see through how strictly or loosely a fund interprets the ESG criteria. The self-description in the sales prospectus offers vague indications for this. This is especially true for the inexpensive ETFs (Exchange Traded Funds). There is no fund manager here who actively decides which companies to include. Instead, the fund passively tracks certain indices, for example the MSCI World or his or her more or less sustainable offshoot. The criteria according to which these indices are compiled can only be found out after intensive research. If any.
Target “eco” funds
Those who want to have a good conscience can also invest in actively managed funds. Of course, this is also a matter of trust. In the case of fund companies that already have “eco” in their name, one can hope that there are convincing people at work. However, they can be lavishly rewarded for their services: The funds from Ecoworld For example, with a front-end load of up to five percent and an annual management fee of up to 2.5 percent, they are quite expensive even compared to other active funds.
Anyone who randomly checks the composition of relevant funds or ETFs will make a remarkable discovery: the largest shares are often made up of digital companies such as Microsoft, SAP, Nvidia, Telekom, Alphabet, Amazon or Apple. On the one hand, this is logical because they have less CO in relation to their sales2 produce than a steel manufacturer, for example. But on the other hand, it is questionable whether an investment in these usual suspects really benefits the climate. Possibly the leverage would be greater in a steelworks – namely if funds as representatives of the shareholders advocate a more environmentally friendly corporate policy. Which, however, not all managed funds do. And certainly not ETFs at all.
So it doesn’t help: Investors have to think for themselves about their return target, their need for security and their pain threshold with the ESG criteria. But a uniform European seal could at least bring more transparency to the matter. But when natural gas and nuclear power are included, the seal loses its value. Institutional investors could then withdraw into the position of at least formally adhering to sustainability rules.
In fact, the financial sector is apparently not happy either. And private investors still have to fish in the fog for suitable investments. Portals such as Cleanvest, Financial test, Morningstar, Ecoreporter and the Forum for Sustainable Investments, but it remains troublesome. The EU has gambled away a great opportunity here.