The intense debate around sustainability in recent years has left its mark on the portfolios of institutional investors in Germany. The number of institutional investors who have not adopted ESG investment strategies has shrunk to just a handful, while the proportion of those who do invest sustainably recently climbed to a record level of 80 percent.

This is one of the key findings of Union Investment's annual sustainability study. This year, 166 institutional investors – responsible for several trillions of euros in assets under management – participated in the study.

In Germany, 80 percent of institutional investors now use sustainable strategies in their investment activities – the highest level ever recorded. Last year, this figure stood at 72 percent, while five years ago, only 60 percent invested sustainably. "

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," says Alexander Schindler, the member of Union Investment's Board of Managing Directors responsible for business with institutional clients.

"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 percent rated their own knowledge of the subject as good or very good, whereas now, 60 percent 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 percent to 56 percent.

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

Exclusion criteria are the most common method for selecting sustainable investments. They are used by 92 percent of investors who apply sustainable strategies. But at the same time, three quarters (74 percent) 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," emphasizes Schindler.

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

"Practising engagement as an active investor is time-consuming, but it is also a highly effective tool for persuading companies to adopt the sustainability preferences of investors in a targeted and lasting way. Consequently, it makes sense for institutional investors to use third-party service providers to pursue an engagement approach."

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 percent anticipate a strong or very strong increase in the volume of ESG investments over the next twelve months – an increase of 14 percentage points compared with last year's figure.

Persistent regulatory pressure was cited by 70 percent 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.

Investors in Germany agree on one crucial point: The transformation towards a sustainable economy will shake up the existing order and entail new opportunities and risks for the capital markets.

However, not all sectors and business segments offer the same scope for opportunities. German institutional investors believe that the energy sector (95 percent) and the transport and mobility sector (93 percent) hold particularly great potential for sustainable investment.

In this context, investors are focused primarily on climate change and its associated risks and opportunities. Of all survey participants, 92 percent believe that the capital markets have not yet priced in climate risks to an appropriate degree.

The majority (55 percent) regard the plan of putting an initial price of €25 per tonne on CO2 emissions – an idea that forms part of the German government's climate package – primarily as an opportunity for the German economy rather than a risk.

However, around three quarters of the respondents (72 percent) think that the price of €25 per tonne, as suggested by the German government, is actually not adequate. Instead, they advocate a figure of around €63 on average – more than twice the suggested cost.

The fact that investors are very satisfied with their ESG investments can be attributed, at least in part, to the performance of these investments. Out of 130 respondents who use both sustainable and conventional investment strategies, only two stated that their sustainable investments generated a lower return than their conventional portfolios.

By contrast, 12 percent reported that their sustainable investments performed significantly better. With regard to risks, 25 percent believe that their sustainable portfolio has a clear edge. A little over half of this group of respondents (59 percent) stated that their sustainable and conventional portfolios delivered a similar performance and just under half (46 percent) felt that both were roughly on a par in terms of risk.

"These findings underpin the results of several studies, which generally found that sustainable strategies do not come with a disadvantage in terms of performance and may, in fact, even offer slight benefits. In addition, it seems that sustainability-focused strategies have so far weathered the current coronavirus crisis slightly better than conventional strategies," Schindler attests.

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The intense debate around sustainability in recent years has left its mark on the portfolios of institutional investors in Germany. The number of institutional investors who have not adopted ESG investment strategies has shrunk to just a handful, while the proportion of those who do invest sustainably recently climbed to a record level of 80 percent.

This is one of the key findings of Union Investment's annual sustainability study. This year, 166 institutional investors – responsible for several trillions of euros in assets under management – participated in the study.

In Germany, 80 percent of institutional investors now use sustainable strategies in their investment activities – the highest level ever recorded. Last year, this figure stood at 72 percent, while five years ago, only 60 percent invested sustainably. "

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," says Alexander Schindler, the member of Union Investment's Board of Managing Directors responsible for business with institutional clients.

"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 percent rated their own knowledge of the subject as good or very good, whereas now, 60 percent 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 percent to 56 percent.

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

Exclusion criteria are the most common method for selecting sustainable investments. They are used by 92 percent of investors who apply sustainable strategies. But at the same time, three quarters (74 percent) 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," emphasizes Schindler.

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

"Practising engagement as an active investor is time-consuming, but it is also a highly effective tool for persuading companies to adopt the sustainability preferences of investors in a targeted and lasting way. Consequently, it makes sense for institutional investors to use third-party service providers to pursue an engagement approach."

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 percent anticipate a strong or very strong increase in the volume of ESG investments over the next twelve months – an increase of 14 percentage points compared with last year's figure.

Persistent regulatory pressure was cited by 70 percent 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.

Investors in Germany agree on one crucial point: The transformation towards a sustainable economy will shake up the existing order and entail new opportunities and risks for the capital markets.

However, not all sectors and business segments offer the same scope for opportunities. German institutional investors believe that the energy sector (95 percent) and the transport and mobility sector (93 percent) hold particularly great potential for sustainable investment.

In this context, investors are focused primarily on climate change and its associated risks and opportunities. Of all survey participants, 92 percent believe that the capital markets have not yet priced in climate risks to an appropriate degree.

The majority (55 percent) regard the plan of putting an initial price of €25 per tonne on CO2 emissions – an idea that forms part of the German government's climate package – primarily as an opportunity for the German economy rather than a risk.

However, around three quarters of the respondents (72 percent) think that the price of €25 per tonne, as suggested by the German government, is actually not adequate. Instead, they advocate a figure of around €63 on average – more than twice the suggested cost.

The fact that investors are very satisfied with their ESG investments can be attributed, at least in part, to the performance of these investments. Out of 130 respondents who use both sustainable and conventional investment strategies, only two stated that their sustainable investments generated a lower return than their conventional portfolios.

By contrast, 12 percent reported that their sustainable investments performed significantly better. With regard to risks, 25 percent believe that their sustainable portfolio has a clear edge. A little over half of this group of respondents (59 percent) stated that their sustainable and conventional portfolios delivered a similar performance and just under half (46 percent) felt that both were roughly on a par in terms of risk.

"These findings underpin the results of several studies, which generally found that sustainable strategies do not come with a disadvantage in terms of performance and may, in fact, even offer slight benefits. In addition, it seems that sustainability-focused strategies have so far weathered the current coronavirus crisis slightly better than conventional strategies," Schindler attests.