DACH's ESG investment market nears the €1 billion mark

02 November 2020 Consultancy.eu

Sustainable investments are booming across Europe. In the DACH region – spanning Germany, Austria and Switzerland – alone, the market has more than doubled in the past year. According to a new study, this is likely to grow further, as the EU looks to subsidise investments which will help it meet its climate targets for 2030.

The volume of sustainable investments in the DACH region increased in 2019 compared to the previous year by some distance. According to research from consulting firm Strategy&, it has more than doubled to €839 billion. This leap has been underwritten predominantly by institutional investors – which account for 68% of sustainably invested funds.

In Germany for example, church institutions and welfare organisations are the most important group of investors. However, another driving force behind booming sustainability investments is that the private sector is suddenly waking up to the opportunity.

SUSTAINABLE INVESTMENTS1 FOR PRIVATE & INSTITUTIONAL INVESTORS IN GSA2 REGION (EUR BN)

Around 32% of sustainable investments now come from private investors – a substantial spike from the 25% in 2017. This is partially because public attention on ESG topics is continuing to increase – now grabbing three times the amount of attention they did in 2018 – but private firms are also increasingly aware that if they can get ahead of the curve now, they will be able to prime themselves for a big return further down the line, as sustainable services and products become essential to offset the worst impacts of climate change.

Factors behind the growth

1. Financial gain
Several international studies have demonstrated the correlation between environmental, social and governance (ESG) focus of companies and better financial returns. The current pandemic has not seen this slow, as shown by the fact that in the first quarter of 2020, 94% of global ESG indices outperformed their benchmarks.

On top of this, companies performing poorly on ESG have been found to be more likely of receiving credit rating downgrades. This in turn means that borrowing and funding investments becomes relatively more expensive, which leads to higher costs.

RELATIVE PERFORMANCE OF ESG INDICES

Investors in Germany, Switzerland, and Austria appear to be well aware of these two relationships. “Even during the corona pandemic, ESG indices are recording sustained high growth, which is why asset managers should continue to expand their product range with sustainable offers,” stated Peter Gassmann, European Head of Strategy&.

2. Social pressure
Over the last decade, ESG risks have swiftly risen to the top of the investment community’s agenda. One survey from EY previously found that 92% of investors agree that over the long-term, ESG issues such as climate change and executive diversity have quantifiable impacts on businesses. To the public, however, these issues have become even more essential – and there is arguably a stronger impetus placed on firms to act responsibly to prevent climate change than ever before.

In this regard, strong intrinsically motivated ESG movements are in the interest of investors looking to win over public opinion. With many other companies now aiming at a long term goal to reduce the carbon emissions to net-zero, some investors are pushing to align the investment industry on this matter.

Examples of this include the Net-Zero asset owner alliance of world-wide insurers and pension funds – comprising a total of $4.6 trillion assets under management – and the Partnership for Carbon Accounting Financials (PCAF), founded by several global financial institutions and comprising $5.3 trillion in assets.

Sustainable finance work stream

3. Regulation
It are not only social pressure which investors will have to respond to in the coming years. The European Union is pushing to achieve climate targets through a range of regulations. As of 2021, EU regulations are set to significantly incentivise private capital flow towards financing sustainable projects.

At the same time, the EU will introduce a ‘green taxonomy’ specifying which business activities are sustainable and set a label for green financial products, while financial advisors will have to inform their customers about the sustainability of financial products.

Commenting on the sector’s importance to meeting targets, Gassmann said: “The financial services industry can make a decisive contribution to achieving climate neutrality.”


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