Germany’s past renewables successes have been underpinned by government and public funds and guarantees. Its future will depend more and more on private investment, which means citizens and small investors must opt to put their money into green investments and take on risk. The good news is that surveys show citizens are very willing. The bad news is that few are actually doing it. Is it because the banks aren’t promoting sustainable investments, or that they are too complex or vague? Benjamin Wehrmann at CLEW looks into the issue. He finds it’s not because the investments are poor: they are meeting the benchmark. So will new EU investment rules fix these problems? Or will the financial conservatism of many Germans mean they are a tough nut to crack when it comes to making targeted climate-friendly investments.

Citizens have been a crucial driver of Germany’s energy transition and many regard sustainability and especially environmental action a crucial feature of sound investments.

Yet, the vast majority of savings in the country are not invested along sustainability criteria, a discrepancy that many finance professionals blame on flawed counselling in bank customer pitches and overly complex investment products.

New EU regulation is meant to provide a remedy to this shortcoming, but the financial conservatism of many Germans could mean that they are a tough nut to crack in terms of making targeted investments.

The roll-out of Germany‘s energy transition (Energiewende) depended to a large extent on industrious citizens and small commercial investors. Their venture to put money into green technology coincided with fertile political conditions that let their investments flourish. The country’s trademark Renewable Energy Act (EEG) in 2000 allowed these early adopters to benefit from guaranteed returns and helped expand wind and solar power to a scale that substantially lowered investment costs for renewable energy and other transition technologies.

Nearly 20 years after the renewable act’s introduction, a large part of Germany’s renewable power capacity is still owned by citizens – but investing in green and sustainable projects appears to remain a passion of the few.

Private investors, small savers not investing. Yet

German private investors, meaning small savers and others looking for ways to gain from their private assets, have long-standing experience with and show continuously high support for the Energiewende, the parallel phase-out of nuclear power and fossil fuels and shift to a more efficient energy system based on renewable power. Nevertheless, most still do not invest in financial products that explicitly support clean technology and are managed under the so-called ESG criteria, which gauge the environmental, social and good governance dimension of investments. Only 12 percent of private investors surveyed by asset management company Union Investment said they have put money into sustainable products – even though almost half of all respondents said they think it would be a good idea.

“A lack of transparency and knowledge about the products seems to keep investors from putting their savings into it with good conscience,” said Union Investment’s private customer manager Giovanni Gay said in a press release. “Sustainable products have to become simpler and easier to understand to meet customer demands.” But growing concerns over global warming and falling costs for renewables have begun to trigger a change in attitude.

The interest in green and sustainable finance products is growing rapidly and many private investors have done away with the notion that only financial professionals should care about the impact of investments on climate change, social justice and other non-financial aspects, the survey showed. According to investment manager Gay, sustainable finance has long ceased to be considered a “temporary fashion” for private investors and instead has become a viable alternative in times of persistently low interest rates.

New EU counselling rules for banks expected to trigger interest in sustainability

Two factors are hampering investor interest in green and sustainable finance options. First, many banks do not regularly inform their customers about sustainable investment options, a shortcoming that the European Commission addresses in its sustainable finance action plan, which names greater transparency for investors as key necessity. With the EU’s updated Markets in Financial Instruments Directive (MiFID II), asset managers will be obliged to include information on how they handle ESG-related risks and on sustainable investment vehicles in their sales documents “as part of their duty to act in the best interest of clients”. The Sustainable Investment Forum (FNG), a finance industry association that analyses green and sustainable investments in German-speaking countries, said the new EU rules are likely to quickly increase demand for more detailed counselling on sustainability aspects by financial consultants.

Exclusion criteria: weapons, labour rights, fossil fuels

The second factor is the unclear definition of sustainable finance and the resulting lack of standard procedures and certifications. It is common practice to exclude companies from investment portfolios that engage in certain undesirable activities, such as producing controversial weapons or violating labour rights. But just how to deal with companies that, for example, supply weapons producers, and the promotion of better business practices, is not as clear.

The sustainability principles of asset management providers like DWS, a branch of Germany’s biggest commercial bank Deutsche Bank, only contain a very narrow range of exclusion criteria, meaning the bulk of its assets under management continues to fund companies that make money with war weapons or fossil fuels, for example, NGO Association of Ethical Shareholders said.

“Best-in-class” criteria too vague

Other sustainability principles are based on so-called “best-in-class” schemes, in which companies performing better than their competitors on metrics like greenhouse gas emissions or worker protection. But this approach is more complicated and private investors may have less patience for understanding how it works.

Gerhard Schick of NGO Finanzwende said such relative performance indicators lack absolute effects: “It allows practically every company to excel in some category and still gives no indication of its overall credentials”, Schick told Clean Energy Wire. “If every company is still seen as a legitimate investment target, the steering effect is zero,” Schick said. In order to really use the financial sector’s leverage for reaching climate targets and to promote better corporate governance in accordance with the ESG criteria, more binding sustainability concepts are necessary, Schick said.

Investors do not lack noble goals but largely ignore sustainable options

But apparently most people in Germany do not even need to be convinced of the importance of individual investment decisions for climate policy. While ESG criteria cover a wide range of topics, the environmental component has the greatest influence on investors’ readiness to review their investment choices. In a separate survey by Germany’s finance authority BaFin, a majority say that protecting the climate is the most important task sustainable finance has to address.

By the same token, financial consequences were most Germans’ main worry when confronted with the impact of climate change, according to a 2018 survey by the European Investment Bank (EIB). Almost half of respondents said rising costs of insurance, energy or food, and higher taxes were their chief concern over the next decade, whereas only 45 and 39 percent, respectively, said they were most worried about social challenges and health problems. However, most people in Germany and also across Europe said individual citizens bear the greatest responsibility to act against climate change.

Sustainable Investments are meeting the benchmark

Many investors who do not want to face the difficult task of monitoring markets themselves put their assets into so-called exchange traded funds (ETFs), which passively mirror the development of selected market indices. Even though, according to the BaFin survey, about 40 percent of private investors in Germany would accept lower returns if they knew their assets were managed sustainably, this sacrifice is apparently not even necessary, as a look at the performance of sustainable investments over time reveals.

Consumer protection organisation Stiftung Warentest said while there currently are only a limited number of ETFs that implement sustainability criteria and reflect global indices, these brought sound returns that on average did not perform worse than the important reference index MSCI World over five years until 2018 – and even slightly outperformed it when looking at the previous three years only.

Investment associations warn additional regulation could suffocate existing ESG approaches

Stricter minimum standards already exist in sustainability rankings offered by specialised agencies, such as ISS Oekom, MSCI or Sustainalytics. Moreover, sustainable finance forum FNG established the country’s first sustainability certification in 2015, allowing small investors to gauge the ESG credentials of potential investment targets. The certificate also promotes funds that are particularly strict in respecting the ESG criteria.

However, irrespective of the individual rating’s merits and accuracy, they do not offer a coherent frame of reference. The European Commission wants to streamline the multitude of existing approaches and resolve information asymmetries by creating a common European classification system of the types of investment activities available to private investors, a so-called taxonomy.

“The EU plan sets the course for supporting sustainable investments”, said Thomas Richter, head of the German Investment Funds Association (BVI), which says it represents the investments of more than 20 million households. The BVI has said a better identification of risks and a clearer description of asset managers’ sustainable investment goals are steps in the right direction but warned that proper customer counselling on ESG could only happen after the EU has agreed on a taxonomy. Banks and other asset managers could not be compelled to give advice on something that has not been defined yet: “The Commission should not take the second step before it takes the first one,” said Richter.

Create new criteria, or improve existing ones?

In addition, Frank Dornseifer of the alternative investor association BAI warned against a “hype” around the EU taxonomy that could create more bureaucracy and smother existing approaches to implement ESG concepts. According to the BAI, there are already many sound ESG integration approaches that allow investors to act sustainably on their own initiative. “Evaluating and developing existing and globally accepted standards is much more important than re-inventing everything from scratch in the complex European legal process with all its obstacles,” the BAI said.

“Especially institutional investors are much more advanced in terms of sustainable investment than one might think,” Dornseifer said. He argued that sustainability could not be imposed from above through political compromise and had to be achieved by raising awareness. “It comes down to farsighted, considerate and holistic conduct by investors.”

Likewise, the association of Germany’s public banks, DSGV, expressed doubts about inducing “social policy developments” through regulatory law. “Ultimately, it’s on people to create demand for sustainable finance products by increasing their demand for sustainable products,” the DSGV said. “People need to be able to decide which combination of risk, liquidity and returns suits them most.”

Financial conservatism makes Germans a hard nut to crack for green finance

One possible reason why Germans nevertheless still seem to take little interest in investing in green and sustainable projects, such as the country’s highly capital-intensive Energiewende, may be cultural – and also structural. There is a general scepticism towards financial speculation and preference for financial security, even at the expense of lower profits. In addition, the capital market is not as important for Germans as it is for people in many other countries, since their pensions are often covered by a pay-as-you-go system. This means funds are directly redistributed from the working population to pensioners, rather than drawing from invested capital.

“There is definitely something peculiar about Germany in this case. The four preferred options of Germans for what to do with their money are either putting it into a savings account, into a fixed-deposit account, into an overnight money account or into a building loan contract,” said Christian Klein, corporate finance researcher at the University of Kassel.

Klein says there is private capital in abundance in Germany waiting for productive and sustainable investments, but risk-averse German investors would need much more sustainable investment models with fixed interest rates. “We simply offer the wrong kind of financial products,” Klein said. Yet others say that they do not invest their money at all and simply keep it in a savings account, he added. “But in that case, it’s the bank that does at it pleases with the money and the saver has no influence on it.”

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Benjamin Wehrmann is staff Correspondent for Clean Energy Wire

This article is published under a “Creative Commons Attribution 4.0 International Licence (CC BY 4.0)”