ESG: Education is key for retail investors

By Chris-Oliver Schickentaz, Chief Investment Officer, Commerzbank AG

Sustainable investing is playing an increasingly important role for a growing number of institutional investors. By contrast, many retail investors still find it difficult to make sustainability a key feature of their investment choices. This has various reasons but is usually associated with common misconceptions. After contradicting four myths about sustainable investing, we conclude: "A strong performance and a clean conscience can go hand in hand!”

2022 will be a turning point

The European Union has decided that the issue of "sustainability in investment" should be firmly integrated into the private client business by summer at the latest. The goal is that financial service providers will discuss with each client in the securities business the extent to which sustainability criteria should be taken into account in the investment process.

During this process, clients will have a clear-cut choice: They can completely reject a sustainability preference, be interested in products in accordance with the EU taxonomy, focus on strategies with sustainable

investments or choose exclusion criteria that reduce negative sustainability impacts.

This regulatory requirement should provide a massive boost to sustainable investing in retail banking. Yet one prerequisite for this outcome is the availability of effective, easy-to-understand client information. After all, many retail investors have not yet mastered the concept of how to combine investing and acting responsibly. There are still some misconceptions that stand in the way of the success of ESG investments. And it is urgent that we dispel them.

Misconception 1: Sustainability eats into returns

The biggest misconception: Investing in sustainable assets comes at a price of lower returns. At first glance, this may sound plausible. After all, when investing sustainably, investors exclude part of the available investment universe and thus, supposedly give up potentially lucrative opportunities. Moreover, we investment strategists have always underscored in a mantra-like fashion the need for diversification. The exclusion criteria of sustainable investments would seem to contribute to less diversification in this respect as well.

However, empirical studies have demonstrated that the opposite is true. Over the medium to long term, sustainable investments generate the same returns as traditional investment solutions - but with a lower investment risk. This is because when focusing on sustainability, investors systematically exclude companies that they would not want to own in their portfolio anyway: Companies that do not use available resources efficiently, that exploit their employees or suppliers, or that take are exposed to considerable reputational risks due to a lack of appropriate controlling processes.

Yet the truth is: Sustainable investing is no more expensive than conventional investing.

Credit someone here…

Sustainable asset management costs the same as "traditional" asset management, sustainable investment funds can be purchased at the same fee conditions as all other investment fund products, and even in the ETF segment, many sustainable ETFs are available at no extra cost.

Misconception 2: Sustainable investing is more expensive

When it comes to organic food in the supermarket, we are used to paying considerably more than for regular food products. Many retail investors blindly carry this pricing model over to investing money as well. Yet the truth is: Sustainable investing is no more expensive than conventional investing.

Misconception 3: Sustainability = Green investments

Many investors believe that only wind power operators and solar cell manufacturers qualify as sustainable investment solutions. This is wrong! Sustainability means much more than just a favourable ecological footprint. In addition to environmental criteria, social and corporate governance criteria such as the existence of sound controlling processes also matter in sustainable investment.

The asset management industry needs to address this misconception, going forward, as we are partly to blame for this. In recent years, we have placed a very strong focus on the environmental aspects of sustainable investment. This has further cemented the false impression of many retail investors. Investors who invest sustainably are not only "green", but also socially responsible, transparent and immune to misconduct.

The big risk: Our industry is taking the easy way forwards

The biggest risk with the new regulatory requirements is that our industry is taking the easiest way forward by selling mainly products with exclusion criteria in the retail business. In my eyes, that would be a huge mistake. Sure, such solutions are easier to implement and easier to communicate. But what is the point if we categorically exclude investments in certain industries? What is gained if we build up a CO2-neutral portfolio in this way? This does not improve our real environment. And yet, that is exactly what we ultimately want to achieve with sustainable investment strategies. We need to use our capital allocation power to change things for the better, to achieve measurable improvements in our daily lives. And to constructively accompany and, if necessary, accelerate the positive transformation of companies towards greater sustainability. Of course, such impact strategies are much more complex and demanding than simple exclusion strategies. However, the rewards for us and future generations are well worth the extra effort.

My recommendation

The new EU regulatory requirements could provide sustainable investing a significant boost in the retail investment business. However, a prerequisite for this is that we as an industry conduct the necessary educational work and explain in an easily understandable way why sustainability pays off for the investor in the medium term. Importantly, we should avoid the easy way forward through investing merely in strategies that comply with the exclusion criteria, and instead push for real change by implementing impact strategies.