Sustainability – the term stands for a megatrend in financial investment that continues to gather pace. Year after year, more and more money is flowing into financial products bearing this label. At the same time, the investment industry is launching more and more such investment offerings on the market.
According to the U.S. investment company American Century, new record sums were invested in this area worldwide in 2020. According to the report, investors put a total of $490 billion into green, social and sustainable bonds last year. Another $347 billion flowed into equity and other mutual funds with this focus worldwide, it said. In the process, the investment industry around the globe launched more than 700 new such products.
Especially in the fourth quarter of last year, inflows skyrocketed, American Century analyzes. By far the largest part of the action took place in the European region. Also, according to ratings agency Morningstar, net inflows into sustainable funds available to European investors nearly doubled last year compared to 2019.
Investors need to be on their guard, however, as there is much to consider in this fast-growing market. Hotly debated is still the question of which businesses and corporate activities fall under the ESG label at all, which was introduced as a synonym for sustainability (ESG stands for Environment, Social, and Governance).
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The diversity of green products
Just how differently the requirements can be interpreted can be seen in the portfolios of various sustainability funds: Some products are narrowly focused on specific areas, such as the green energy sector, while others have a much broader investment spectrum. One example is the billion-dollar “NN (L) Global Sustainable Equity” fund from the investment company NN Investment Partners, which has global corporations such as Microsoft, Amazon, Google’s parent Alphabet, or the food giant Nestlé among its largest investment positions and thus hardly seems to differ from conventional blue-chip investment funds.
In addition, there is the well-known risk of “greenwashing,” which can be roughly translated as “label fraud.” What is meant is the risk that a provider or a company is not entirely honest with its claims just to meet certain ESG criteria. Just last week, the world’s largest asset manager, Blackrock, came under fire in this context for not being sufficiently transparent about its own involvement with a palm oil supplier of consumer goods company Procter & Gamble in a dispute.
However, various approaches are already in place to give private investors more guidance. Some rating agencies have specialized in this market: They take a close look at corresponding investment products and rate them. The European Union has also recognized the importance of the issue: In March, the EU enacted the first part of its Sustainable Finance Disclosures Regulation (SFDR), which, among other things, sets out certain rules for fund companies regarding their ESG activities.
Last week, it was also announced that the German government is also taking action in the area of sustainable investment. To this end, it has drafted a so-called Sustainable Finance Strategy, with the help of which investments are to be mobilized that serve climate protection and sustainability. In this context, investors are to be given a “sustainability traffic light” to help them distinguish between green investments.
Price exaggerations for ESG favorites on the stock market
However, one risk that is increasingly perceived in the market for sustainable investments can hardly be eliminated with regulation and guidance: The risk of price exaggerations and even speculative overheating in individual, particularly popular ESG stocks.
The problem here is that more and more investment managers tend to use similar criteria when selecting the stocks to include in their ESG funds. As a result, many of them end up with the same investments – sometimes driving the prices of these companies up unduly.
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First published in manager magazin, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.
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