80% of German institutional investors now use ESG strategies – Union Investment

Eighty per cent of German institutional investors now use environmental, social and governance (ESG) investment strategies, according to research by Union Investment.

Its survey of 166 institutional investors in Germany, of which 12 per cent were pension funds, found that the number of investors incorporating ESG into their investment strategies is the highest ever recorded, increasing from 72 per cent in 2019, and just 60 per cent in 2015.

“The fact that four fifths of institutional investors now include sustainability criteria in their investment decisions shows that the intense debate around sustainability and climate change has been effective,” Union Investment board of managing directors member, Alexander Schindler, said.

“Most investors are aware that sustainability has become an important investment dimension. After all, ESG criteria help investors to gain a clearer picture not only of the risks but also of the investment opportunities associated with sustainability.”

Investors’ knowledge in relation to sustainable investing has also improved. Five years ago, only 38 per cent rated their own knowledge of the subject as good or very good, whereas now, 60 per cent claim this level of expertise. The proportion of investors who are satisfied with their sustainable investments has also risen significantly. Over the past five years, it has increased from 43 per cent to 56 per cent.

More than half (56 per cent) of the assets held by institutional investors who apply sustainability strategies are invested in accordance with environmental, social, ethical and governance criteria. This ratio is particularly high among church organisations and charitable foundations (75 per cent). But insurance companies also scored highly in this respect with 66 per cent.

An exclusion criterion is the most common method for selecting sustainable investments. It is used by 92 per cent of investors who apply sustainable strategies. But at the same time, three quarters (74 per cent) of the respondents were opposed to excluding companies from sustainable portfolios that have plans for transforming into a sustainable business but have not yet completed this process.

“The most interesting companies from an investor’s point of view are those undergoing a transformation. As an active and sustainable investor, you want to identify and support these companies before the wider market takes notice of their potential,” Schindler explained.

The next most common selection approach after exclusion criteria is the use of a negative screening process (72 per cent), followed by positive screening (58 per cent) and the best-in-class approach (55 per cent). Only a third of the respondents (34 per cent) actively engage with the companies they have invested in, even though 57 per cent of them describe this form of dialogue as particularly effective.

The vast majority of investors believe that the importance of sustainable investment strategies will continue to grow in the future. Of the survey participants, 83 per cent anticipate a strong or very strong increase in the volume of ESG investments over the next 12 months – an increase of 14 percentage points compared with last year’s figure.

Persistent regulatory pressure was cited by 70 per cent of the respondents as the reason for intensifying their involvement in sustainable investing. The same proportion of investors also regard climate policy-related regulation as generally useful and believe that sustainable investing can have a positive impact on the future of our planet’s climate.

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