Sustainability is one of the major issues facing us today. It is therefore no surprise that the world of finance has reacted to this important trend. Nevertheless, there is still some uncertainty with regard to sustainable investments. Here are some essential answers on the topic:
1. What are sustainable investments?
Sustainable investments are closely related to so-called ESG factors. The abbreviation “ESG” stands for “environmental, social, and governance.” DWS assesses sustainable equity investments based on the performance of the company in these three areas.
When looking for sustainable stocks, index providers and portfolio managers usually start by excluding companies that manufacture weapons of mass destruction or enriched uranium, for example. The remaining companies are then assessed using the three ESG factors. Specifically, with regard to the environmental factor, this involves considering the conservation of resources or preservation of natural habitats; concerning the social aspect, employment rights and nondiscrimination; and regarding governance, the companies are tested to ensure they have a stable management structure in place.[1]
2. Are sustainable investments actually profitable?
There is a persistent fear among investors that lower returns are the trade-off for investing sustainably. The opposite is usually true, however. An analysis by the Global Research Institute of over 2,000 studies showed that only fewer than 10 percent were able to prove that ESG factors had a negative impact on financial results, while over half showed that ESG factors had a positive impact.[2]It made no difference which of the three ESG factors the companies focused on. According to the meta-study, both environmental and social awareness as well as good corporate governance can have a positive effect on financial results.
Nevertheless, these positive effects mainly became apparent when the company performed exceptionally well in one particular ESG area. By contrast, companies that mixed the three factors rarely produced better financial results. [2]
3. Are the risks associated with sustainable investments higher than with conventional investments?
An analysis by the Steinbeis University in Berlin shows that despite the good return opportunities they offer, the risks associated with sustainable investments are no higher than with conventional investments. It also showed that the risk/return profile is even better than that of the market as a whole, especially when it comes to bonds and equities.[3]
4. Sustainable investing – a passing fad or long-term trend?
Sustainability has been an important issue for many years now. Almost 70 percent of German consumers say that it represents a key factor when making a purchase.[4] It is no surprise that the interest in “green money” has risen considerably, and continues to grow. According to a Scope study, since 2015, over 90 new sustainability funds were launched for German investors, for example.[5] The investment volume in the German market for sustainable and responsible investing has been growing for a number of years. This trend is likely to continue in the years to come.[6]
Positive impact of ESG factors on companies
There are now numerous sustainable investment funds available for private investors. With these funds, specialists carry out a lot of the analysis on behalf of investors. For example, DWS assesses sustainable investments using a sophisticated three-step process:
- The first step involves excluding companies with nonsustainable business models.
- As part of the second step, comprehensive assessments of the individual companies are carried out with the help of seven external rating agencies.
- In the third step, the external results are reviewed by the DWS experts, who add their own valuations.[7]. This makes it possible for private investors to access ESG-compliant investments.
DWS Invest ESG Equity Income: sustainability and dividends
One equity fund dedicated to the theme of sustainable investments is DWS Invest ESG Equity Income, for example. The special feature of this fund is that the fund portfolio only contains companies that run their businesses in a sustainable manner and also offer the opportunity to generate regular income through attractive dividends. This means that by investing in the fund, investors can focus on the topic of sustainability while also benefiting from dividends.
More information on the investment strategy and fund facts for DWS Invest ESG Equity Income
1. Sustainable investments, DWS, as at: October 13, 2018 (https://www.dws.de/entdecken/im-fokus/nachhaltige-geldanlage/).
2. Global Research Institute, ESG & Corporate Financial Performance: Mapping the global landscape, as at: October 13, 2018 (https://institutional.dws.com/content/_media/K15090_Academic_Insights_UK_EMEA_RZ_Online_151201_Final_(2).pdf).
3. Steinbeis University, Berlin. Nachhaltige Investments aus dem Blick der Wissenschaft: Leistungsversprechen und Realität (Sustainable investments from a scientific perspective: Promised benefits and reality), as at: October 13, 2018 (German only) (http://www.steinbeis-research.de/pdf/Executive%20Summary_Nachhaltige_Investments_aus_dem_Blick_der_Wissenschaft.pdf).
4. Facit Group, Sustainability Image Score 2017, as at: October 13, 2018 (https://www.facit-group.com/studien/sis/).
5. Scope Analysis, Nachhaltige Investmentfonds: Vom Nischenthema zum Megatrend (Sustainable investment funds: From niche topic to megatrend), as at: October 13, 2018 (German only).
6. Forum Nachhaltige Geldanlagen (FNG), Marktbericht Nachhaltige Geldanlagen 2018 (Sustainable investment market report 2018) as at: October 13, 2018 (German only) (https://www.forum-ng.org/images/stories/Publikationen/fng-marktbericht_2018-online.pdf).
7. DWS International GmbH, www.dws.de, Nachhaltige Geldanlage (Sustainable investments), as at: October 13, 2018 (German only) (https://www.dws.de/entdecken/im-fokus/nachhaltige-geldanlage/).
