- Sustainable investment is becoming increasingly popular.
- Special funds make use of their influence to enable businesses to operate more sustainably.
- Investors can mitigate undesirable risks by following this approach.
First of all: congratulations! Your DWS SDG Global Equities fund has just become one year old – and its orientation is the perfect match for the current discussion in society about sustainability. Your interim assessment?
Well the timing was absolutely perfect, wasn’t it? But seriously: the level of interest in environmental topics and sustainability has increased enormously. On the one hand, this is due to the legislature, which is applying pressure in that direction. For instance, the European Union wants to be climate-neutral by the year 2050. Meanwhile, the consumers’ focus has also changed completely in relation to the past. Consumers now want to know about the conditions in which products are manufactured and may readily decide not to buy them. And take social media, for instance: the image of a beach full of plastic waste spreads across the world in a flash thanks to Instagram & Co. Investors cannot and do not want to dissociate themselves at all from this societal discussion.
There are numerous sustainability funds. What makes your DWS SDG Global Equities so different?
Comprehensive analyses are the answer. We use the ESG approach to this end – and we look at the ESG factors in the process. ESG stands for Environment, Social and Governance. In addition, we also ask which companies actually make a contribution to at least one of the SDGs. This abbreviation stands for Sustainable Development Goals. These are the long-term sustainability goals adopted by the United Nations. One example of these is the climate protection target.
And what does that mean specifically?
Just imagine the use of filters: we check whether a company complies with certain ESG standards; that’s the first filter. As a second filter, we ask specifically what a business does – whether it actually generates sales as contemplated by at least one of those UN sustainability goals. Many other sustainability funds do not perform such an in-depth analysis. The rule as far as we are concerned is that SDG is the core of sustainable investment.
The UN has formulated as many as 17 of these sustainability goals – is it possible for all of these to be transferred to a portfolio without any difficulties?
No, at present there are only eight that can be smoothly implemented. “Climate protection” certainly is the goal that is easiest to present as part of a portfolio. The topics of “Health” and “Water conservation” are similar in nature. Water conservation can be realised with equities issued by utility corporations, but also by investing in securities from certain companies that remediate public sewage collection systems and thus ensure that less water seeps away and is wasted.
How do you browse for companies that really operate sustainably?
By means of the two filters we referred to earlier. We use the expertise of external and specialised data suppliers for both filter stages. For the first stage, there are six providers; for the second stage there is only one at the moment. However, in the future we want to be able to have access to about six providers for the second stage as well. Only in this way do we arrive at a consensus assessment, that is to say a uniform decision taken by sustainability experts.
Do you live and work sustainably yourself?
Oh yes, even literally, in the true sense of the word. I’m from Berlin and therefore keep travelling from Frankfurt to my home town. I also use the car to do so occasionally. Perhaps that doesn’t sound very sustainable. But I do take passengers along for the ride. That’s good for the environment because the car is full. And that’s good for my passengers, who travel from Frankfurt to Berlin at a favourable cost. I also stand to benefit because I lower my own costs. A win-win-win situation, as in the case of a sustainable investment: it’s beneficial to the environment, the company and the investor.
“Child labour? An absolute no-go!”
However, cases still keep recurring in which sustainable investors put their money in businesses that are harmful to the environment, for instance.
That’s true. But the risk is considerably lower in following our approach than if sustainability were to be disregarded altogether. Take reputation risks, for example: If you read in a newspaper or on the web that a company has contaminated a water reservoir or dam, that’s bad. Not only for the business, but also for the investor. After all, an incident of this kind brings substantial pressure to bear on share prices.
An example: A manufacturer of solar collectors is likely to be the absolute textbook case for a sustainable enterprise. But what if he treats his employees badly – can you include his shares in the portfolio?
Remember – our first filter stage ensures that companies are tested to see whether they meet certain standards. Each fund provider operates differently in this regard. At present, we have no company in our portfolio that invests in controversial sectors. For instance, we rule out shares of companies that generate over five per cent of their sales on tobacco. In that case, it is quite irrelevant whether they cultivate potatoes in addition to the tobacco. If, in your example, a solar power company does not operate sustainably, then it will get caught in this ESG filter. In actual fact, such questions keep recurring in daily practice. Two other conceivable examples: a large pharmaceuticals company has fantastic products. But then a suspicion of bribery is raised. We therefore cannot purchase its shares. The same would apply to a Chinese battery manufacturer who procures the cobalt necessary for production from the Congo, where child labour occurs time and again. A no-go! As you can see, the supply chain is likewise of decisive significance. This is why it is so important for us to cooperate with external, specialised service providers who diligently do their homework.
Doesn’t your approach ultimately lead to a collection of companies that hardly differ from one another?
No. On the one hand, some 25 per cent of the companies are sorted out in the first filter stage, with the remaining ones being included according to the sustainability quality. This is referred to as “best in class”. On the other, the investment universe is still large enough even at the end of the inspection process: on average, we identify around 650 equities as SDG champions. These are companies that, in terms of their sales, actually make a contribution towards achieving the sustainability goals. And these are sourced from different sectors, industry segments, and regions. Ultimately shaping a widespread portfolio of 40 to 60 equities is my task as a fund manager. The issues then involve classic key figures and ratios such as profit margin or growth.
How do you determine whether an enterprise is a sustainability champion?
We measure this quite casually according to sales generated. More precisely, we ask what share of sales a company generates by pursuing the sustainability targets. There certainly are other conceivable approaches, but the sales figure is simple, transparent and capable of being proved – we want to be absolutely invulnerable in this regard. On average, at least 50 per cent of sales are to be derived from sources adhering to SDG values. Some companies in the fund even manage to achieve 75 per cent. Each individual company therefore ensures sustainable orientation of the fund in question.
How big is your influence on the companies in which you invest?
We rely above all on talks behind closed doors. When I invest, I tell those responsible at the companies quite clearly what I expect. For instance, that the company further optimises its behaviour as far as environmental issues are concerned. And, if necessary, I also ask why certain steps have been neglected to be taken.
What will the future look like? Will the time come one day when money is only administered sustainably? According to a DWS survey, a respectable third of the respondents already invest like this now.
There still is a long way to go. But I believe that one day, this will be the exact standard.
What do you find particularly exciting about your job?
It’s always exciting for me to be able to implement new trends in my portfolio, such as avoiding plastic. And if I do a good job and the performance is okay, then I can collect a great deal of money for the fund and then channel the money towards sustainable investments. In doing so, I make a positive contribution. I certainly don’t want to have to apologise to my children one day for not having done anything for a better future.
So, sustainability doesn’t only mean having to give up something?
No, neither when investing nor privately. I’m not too keen on prohibitions. Everyone can make a positive contribution without having to dispense with the need for everything. Air travel must not necessarily be eliminated altogether. But is a flight from Frankfurt to Düsseldorf really necessary? Presumably not, especially since technologies like video conferencing meanwhile help to avoid unnecessary travel.
You’ve been investing sustainably for over ten years now. Has your own attitude changed in the process?
Well, meanwhile I’ve certainly become much more sensitised. And, in a manner of speaking, I have sustainably become more sustainable.