“Choosing a sustainable investment doesn’t mean compromising on return”
What does the coronavirus pandemic mean for sustainable investments? Are investors once again training a sharper focus on return? Or are these the wrong questions to be asking? Markus Müller, Global Head of Chief Investment Office, has a clear opinion.
It seems to be paradox that although studies show that many investments aligned to sustainability and environmental, social and governance (ESG) criteria have been more stable recently than corresponding investments that do not incorporate these criteria, many people still regard sustainability and return as mutually exclusive – and therefore avoid such products.
An analysis conducted by fund rating agency Scope of the performance of numerous investment funds in the first quarter of this year concluded that the majority of sustainable equity funds performed better than their benchmark indices. The opposite was often the case for equity funds without a sustainability focus. A report by Institute of International Finance (IIF) also shows that in the second quarter 80 percent of the selected fixed income indices with an ESG focus outperformed the corresponding indices that do not include these criteria. Nevertheless, the report states that – despite rising volumes – only 2.5 percent of the world’s more than 135,000 funds have an ESG focus.
Deutsche Bank recently set itself the target of increasing its volume of sustainable financing and ESG investment products to at least 200 billion euros by 2025. In a conversation, economist Markus Müller explains how – despite prejudices against such investments – people can be convinced of their merits, and talks about the impact the coronavirus pandemic could have on this segment.
How is the coronavirus pandemic altering the level of interest in sustainable financial products?
The coronavirus pandemic has (...) revealed what we should change
Markus Müller: We have reached a stage where a lot can change if we adopt the right approach. The coronavirus pandemic has shown us this and also revealed what we should change. The changes pertain not only to our companies and economies in general but also to the investment world. Now we have to learn from this pandemic. For our bank this means that we have to illustrate which new ways and means are available. We have to develop a vision of what tomorrow’s world could look like.
What vision do you have in mind?
Müller: In the banking business of tomorrow we’ll have to explain even more clearly to investors the outcomes or potential outcomes of their investment decisions. After all, only once I know about the impact of the investment decision can I then reflect on whether I find it desirable or not. Simply speaking, do we want to carry on living and investing as we did pre-COVID-19, or do we want to do some things differently in future – so that we’re also equipped to tackle future crises? I’m firmly convinced that ESG criteria will be given more weight in future investment and financing decisions.
What will be investors’ main concern: their return or their conscience?
Müller: The two can’t be separated that easily any longer and they are no longer mutually exclusive. We will see greater resilience and long-term stability – especially if investors sense that they can help to shape change. Our job is to support them as they do so and to be transparent when informing them about the consequences: this means using data to show them whether and which investments satisfy ESG criteria and which challenges still lie ahead for companies that are to receive investment.
What do you say to investors who are nevertheless afraid that sustainable investments require them to forgo returns?
I show them that sustainable investments can actually boost portfolio returns
Müller: It’s quite simple: I show them that sustainable investments can actually boost portfolio returns. This doesn’t mean that sustainable investments invariably perform better than investments that are not directly aligned towards ESG criteria. But my loud and clear message is choosing a sustainable investment does not mean having to compromise on return – it’s a conscious decision to promote social stability, environmental protection and good governance.
Really?
Müller: Yes. A sustainable investment that takes into consideration social and governance criteria will probably be less volatile and deliver a more stable future return – a return of sustainable quality. To put it another way, companies that don’t take ESG factors into account won’t necessarily be suitably equipped for the future – in my opinion. Investors should ask themselves whether such firms will still be able to provide them with what they expect from a modern company.
One counterargument is that there are currently relatively few investments with an ESG focus. If there were now to be a significant surge in demand, this could send prices of such products rising and thus dampen returns.
Müller: I don’t believe that this will become a major impediment – especially as the competition in this segment is increasing. Because while demand increases, the supply of ESG products will also expand. An increase in products such as ESG-ETFs will make the capital market more efficient. At the same time people will have easier access to data and information thanks to new technologies. This will make the capital market increasingly transparent. And this will enable sustainable financial services to be offered more cheaply in future.
In the past, growth targets often eclipsed any considerations about sustainability. And once the current crisis is over, growth will once again play a big role. Why should this time be any different?
Müller: Because the current crisis is demonstrating very tangibly the possible outcomes of our existing lifestyles. One example: if biodiversity is reduced due to human interventions then this increases the likelihood that a virus makes the leap from animals to humans and vice-versa. For if sensitive species become extinct, the remaining species, the so-called generalists, will reproduce even faster and come into contact with species that they would never have normally encountered.
If a virus infects one species, it can spread more widely and even cross the species barrier so that it makes the leap to humans faster – especially as humans are encroaching further and further into natural habitats. And globalisation is accelerating this spread. If the virus makes the leap to humans, this ultimately affects every single person and so some changes are bound to take place now.
So you believe this pandemic will raise human awareness worldwide?
This crisis is giving us the opportunity to make some systemic changes
Müller: Yes, we’ll be more concerned about working conditions and will query our attitudes to food and our health. So this crisis is giving us the opportunity to make some systemic changes – to our healthcare system, to corporate supply chains and consequently also to the financial system.
Which role will the younger generation play in this - a generation that has partly inherited its wealth and is apparently more inclined to have their money invested in accordance with ethical standards?
Müller: A big one. We’re living in the so-called late modern era, in which many people already own so much and therefore can and want to pay more attention to non-material issues. At the same time the young generation is well aware of the problems they will face in future. That’s why many young people are choosing sustainable, transparent investments and are demanding that companies have to change substantially to ensure that they are already equipped for the future now.
How should banks react to this?
Banks should fundamentally consider how they work with companies
Müller: Banks have to offer investors a vast range of attractive, ESG-compliant investment opportunities. Furthermore they should fundamentally consider how they work with companies. Above all, they should think about how they can support companies in the transformation processes that many of them will undergo on account of climate change. Banks can and must support firms in their transition – so that instead of disappearing, companies create new jobs in completely new fields and in completely new ways. That’s our job now. Banks are experts in financing and investment structures. So they can advise companies on how they can finance a sustainable business model and how likely clients are to embrace this. I see that as a major task for the future.
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What does the coronavirus pandemic mean for sustainable investments? Are investors once again training a sharper focus on return? Or are these the wrong questions to be asking? Markus Müller, Global Head of Chief Investment Office, has a clear opinion.
It seems to be paradox that although studies show that many investments aligned to sustainability and environmental, social and governance (ESG) criteria have been more stable recently than corresponding investments that do not incorporate these criteria, many people still regard sustainability and return as mutually exclusive – and therefore avoid such products.
An analysis conducted by fund rating agency Scope of the performance of numerous investment funds in the first quarter of this year concluded that the majority of sustainable equity funds performed better than their benchmark indices. The opposite was often the case for equity funds without a sustainability focus. A report by Institute of International Finance (IIF) also shows that in the second quarter 80 percent of the selected fixed income indices with an ESG focus outperformed the corresponding indices that do not include these criteria. Nevertheless, the report states that – despite rising volumes – only 2.5 percent of the world’s more than 135,000 funds have an ESG focus.
Deutsche Bank recently set itself the target of increasing its volume of sustainable financing and ESG investment products to at least 200 billion euros by 2025. In a conversation, economist Markus Müller explains how – despite prejudices against such investments – people can be convinced of their merits, and talks about the impact the coronavirus pandemic could have on this segment.
How is the coronavirus pandemic altering the level of interest in sustainable financial products?
Markus Müller: We have reached a stage where a lot can change if we adopt the right approach. The coronavirus pandemic has shown us this and also revealed what we should change. The changes pertain not only to our companies and economies in general but also to the investment world. Now we have to learn from this pandemic. For our bank this means that we have to illustrate which new ways and means are available. We have to develop a vision of what tomorrow’s world could look like.
What vision do you have in mind?
Müller: In the banking business of tomorrow we’ll have to explain even more clearly to investors the outcomes or potential outcomes of their investment decisions. After all, only once I know about the impact of the investment decision can I then reflect on whether I find it desirable or not. Simply speaking, do we want to carry on living and investing as we did pre-COVID-19, or do we want to do some things differently in future – so that we’re also equipped to tackle future crises? I’m firmly convinced that ESG criteria will be given more weight in future investment and financing decisions.
What will be investors’ main concern: their return or their conscience?
Müller: The two can’t be separated that easily any longer and they are no longer mutually exclusive. We will see greater resilience and long-term stability – especially if investors sense that they can help to shape change. Our job is to support them as they do so and to be transparent when informing them about the consequences: this means using data to show them whether and which investments satisfy ESG criteria and which challenges still lie ahead for companies that are to receive investment.
What do you say to investors who are nevertheless afraid that sustainable investments require them to forgo returns?
Müller: It’s quite simple: I show them that sustainable investments can actually boost portfolio returns. This doesn’t mean that sustainable investments invariably perform better than investments that are not directly aligned towards ESG criteria. But my loud and clear message is choosing a sustainable investment does not mean having to compromise on return – it’s a conscious decision to promote social stability, environmental protection and good governance.
Really?
Müller: Yes. A sustainable investment that takes into consideration social and governance criteria will probably be less volatile and deliver a more stable future return – a return of sustainable quality. To put it another way, companies that don’t take ESG factors into account won’t necessarily be suitably equipped for the future – in my opinion. Investors should ask themselves whether such firms will still be able to provide them with what they expect from a modern company.
One counterargument is that there are currently relatively few investments with an ESG focus. If there were now to be a significant surge in demand, this could send prices of such products rising and thus dampen returns.
Müller: I don’t believe that this will become a major impediment – especially as the competition in this segment is increasing. Because while demand increases, the supply of ESG products will also expand. An increase in products such as ESG-ETFs will make the capital market more efficient. At the same time people will have easier access to data and information thanks to new technologies. This will make the capital market increasingly transparent. And this will enable sustainable financial services to be offered more cheaply in future.
In the past, growth targets often eclipsed any considerations about sustainability. And once the current crisis is over, growth will once again play a big role. Why should this time be any different?
Müller: Because the current crisis is demonstrating very tangibly the possible outcomes of our existing lifestyles. One example: if biodiversity is reduced due to human interventions then this increases the likelihood that a virus makes the leap from animals to humans and vice-versa. For if sensitive species become extinct, the remaining species, the so-called generalists, will reproduce even faster and come into contact with species that they would never have normally encountered.
If a virus infects one species, it can spread more widely and even cross the species barrier so that it makes the leap to humans faster – especially as humans are encroaching further and further into natural habitats. And globalisation is accelerating this spread. If the virus makes the leap to humans, this ultimately affects every single person and so some changes are bound to take place now.
So you believe this pandemic will raise human awareness worldwide?
Müller: Yes, we’ll be more concerned about working conditions and will query our attitudes to food and our health. So this crisis is giving us the opportunity to make some systemic changes – to our healthcare system, to corporate supply chains and consequently also to the financial system.
Which role will the younger generation play in this - a generation that has partly inherited its wealth and is apparently more inclined to have their money invested in accordance with ethical standards?
Müller: A big one. We’re living in the so-called late modern era, in which many people already own so much and therefore can and want to pay more attention to non-material issues. At the same time the young generation is well aware of the problems they will face in future. That’s why many young people are choosing sustainable, transparent investments and are demanding that companies have to change substantially to ensure that they are already equipped for the future now.
How should banks react to this?
Müller: Banks have to offer investors a vast range of attractive, ESG-compliant investment opportunities. Furthermore they should fundamentally consider how they work with companies. Above all, they should think about how they can support companies in the transformation processes that many of them will undergo on account of climate change. Banks can and must support firms in their transition – so that instead of disappearing, companies create new jobs in completely new fields and in completely new ways. That’s our job now. Banks are experts in financing and investment structures. So they can advise companies on how they can finance a sustainable business model and how likely clients are to embrace this. I see that as a major task for the future.
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