Asset Mana­gement - An Eye on Sustainability

Sustainable on a success track: About a quarter of assets under management worldwide are managed sustainably. We show why this is a trend.

Hand with pen controls graphics on desk
Hand with pen controls graphics on desk

There are more than 21,000,000 hits on Google when you search for “sustainability” – a keyword that has become an integral part of public debate today. But what exactly does the term actually for? One widely recognized definition is that a development can be considered sustainable if it “meets the needs of the present without compromising the ability of future generations to meet their own needs.” This is how it is defined in the report by the United Nations World Commission on Environment and Development published in 1987 with the title “Our Common Future.” Since then, the topic has gained increasing significance and spread beyond the world of politics to become an established term in everyday language. For a long time, sustainability has also been playing an increasingly important role when it comes to investments.

Trend toward sustainably managed assets

This is reflected, for example, in the fact that more than a quarter of assets under management worldwide are now managed sustainably. According to a recent study by the Global Sustainable Investment Alliance (GSIA), the volume of sustainably managed assets came to around USD 23tn in 2016, representing a 25% increase in comparison to 2014. And this trend is likely to continue in the years ahead. A survey of pension funds, foundations and associations conducted by the rating agency Telos shows that more and more institutional investors are pursuing a sustainable investment policy. The experts at LBBW Asset Management also feel sure that this development itself is sustainable and will intensify further: “We expect that in ten years’ time there will be hardly any public institutions in Germany that do not invest their money sustainably,” says Christoph Groß, a fund manager at the LBBW subsidiary.

Carbon bubble plays an important role for investors

One of the reasons for this trend, according to Christoph Groß, is the political environment. In the UN climate agreement ratified in Paris in 2015, almost 200 nations undertook to limit global warming to below two degrees Celsius in comparison to pre-industrial levels. Even though US President Donald Trump recently backpedaled and announced that the USA would withdraw from the agreement, the fact is that decarbonization – i.e. moving away from energy sources containing carbon – is already taking place now.

At the same time, the “carbon bubble” anticipated by many experts is playing an increasingly central role in institutional investors’ investment decisions. This means that industries and business models based on fossil fuels could lose significance to a huge extent in the future – which would therefore impact the value of companies with a corresponding focus. “This is likely to affect US energy companies in particular,” says Groß. “So it is no surprise that in the United States this sector is protesting vehemently against Trump’s withdrawal from the climate agreement – it is less interested in the possible short-term benefits for its business activities than in the long-term damage from the probable loss of investors.” This is a very real risk, as Steffen Merker, a fund manager at LBBW Asset Management, is already observing: “Large international investors are already pursuing a policy of divestments - that is, sales of holdings that cause high greenhouse gas emissions.” One example of a major investor that is carrying out such divestments is the Norwegian government pension fund. As the world’s biggest government fund with assets under management equivalent to EUR 840bn, it has sold significant equity investments in coal companies in recent years, for example.

More and more investors are selling off holdings that cause high greenhouse gas emissions.

Steffen Merker, Fund Manager at LBBW Asset Management

Sustainability and high yields certainly not mutually exclusive

It is clear that sustainable investments are not just about acting in a socially, economically and ecologically responsible way. After all, investors are also aiming to generate the best possible yield. Past experience shows that these two goals are certainly not mutually exclusive. On the contrary, a meta-analysis by the Research Center for Financial Services at Steinbeis University in Berlin, based on a total of 195 individual studies on the topic, comes to the conclusion that sustainable investments actually tend to have an advantage over conventional investments. “Strictly sustainable portfolios are far less exposed to certain event risks, such as corporate governance or a carbon bubble, which makes them more resistant to negative shocks,” says Steffen Merker with conviction. The investment topic of sustainability is has accordingly been given high priority at LBBW Asset Management for around 15 years already.

On the market with sustainable products since 2002

The investment experts at LBBW Asset Management launched their first special fund focusing on sustainable investment criteria back in 2002, making the company one of the pioneers in this area. This was followed by further investment solutions for institutional customers and ultimately, in 2008, by the integration of the company into LBBW’s sustainability strategy: Since then, sustainable activity has played a key role not only in the investment policy, but also in the company’s own corporate governance. Not least, the bank also sees enormous growth potential here – this applies equally to customer and proprietary investments and to financing for sustainable innovation and transformation processes in the corporate customer segment.

To this end, LBBW Asset Management has been integrated in its parent company’s sustainability management and has since followed the same sustainability principles. For example, electricity for the buildings is now supplied entirely in the form of green energy. The success of this strategy is demonstrated in the latest sustainability report by the rating agency MSCI ESG Research: With the top grade AA, LBBW is in second place among German banks and is ranked 35th out of the 540 banks analyzed internationally. This assessment is based on the companies’ commitment to environmental, social and governance (ESG) issues, which represents an increasingly important criterion for investors when choosing their assets. The bank performed particularly well in terms of its HR policy and its handling of sustainability risks in its core business.

Sustainable product concepts for private investors, too

At LBBW Asset Management, the success of the topic of sustainability can also be seen in the actual figures: Customer funds totaling more than EUR 1bn are currently invested in line with sustainable criteria. However, a number of major customer are shortly to make a final decision on changing over their investments to a sustainable policy.

One of the reasons for this success goes back more than 10 years when, in addition to individual investment solutions for foundations, family offices and institutional investors, LBBW Asset Management also started developing and launching product concepts for private investors at an early stage. This has enabled the company to build up a longstanding history, performance and reputation on the market. With the three existing mutual funds, private investors have been able to invest in the area of sustainability for over ten years already. “It started with LBBW Global Warming (GER) in January 2007,” explains the responsible fund manager, Christoph Keidel. “Right from the beginning, we invested exclusively in companies whose products are intended to counter further global warming.” This was followed by LBBW Nachhaltigkeit Aktien (GER) in 2008 and finally by LBBW Nachhaltigkeit Renten (GER) in 2010 – two funds that, in contrast to LBBW Global Warming, are not focused on a specific topic, but instead invest broadly in companies and nations with an above-average ecological and social rating.

Regardless of the focus adopted by these and future new funds, the megatrend of sustainability will grow ever more important. And institutional and private investors alike will have a reliable investment partner in LBBW Asset Management.