Lower returns are undoubtedly the biggest myth about ESG investing. We believe the opposite is true. For ESG investments, we try to look beyond a certain investment horizon in the longer term. When you think about it, it makes sense that longer term investments achieve higher returns. Let's consider oil companies as an example. They achieve higher returns in the short term thanks to the current situation. However, their valuations could fall in the long run as the energy transition accelerates. Over time, the inventories on their balance sheets could become effectively worthless. It is those companies which are currently correctly anticipating what will happen next which will be positioned to seize the opportunities here. That is where the potential lies.
Like the latest industrial revolution – or the more recent wave of digitisation – companies that get on board early often benefit from the most potential. As a bank, our job is to try and identify that potential. This means looking at companies that are actively working on future-facing sustainability themes. Some examples include areas such as healthy living, water, waste and recycling, safety and energy efficiency. The latter has become even more important in light of recent developments. One of Germany's goals is to become climate neutral by 2035. The country has brought this forward from its previous target of 2050. Most companies that actively focus on sustainability themes are part of a leading pack. They are certainly not yet the best in class, but they do have aspirations to contribute to the transition. There is huge economic potential here, and it is where we expect the greatest acceleration to occur.
Sustainable investing or impact investing focuses more on what an investment brings about. A sustainable investment is an investment that actively helps to reach an environmental or social target and does not have any harmful effects on the environment or society. The company you are investing in must also show responsible governance. This type of investment therefore takes things one step further than ESG investments and prioritises impact over financial returns.
People are becoming increasingly aware of ESG and sustainable investing. The acceleration here is sharp, particularly thanks to the influence of younger generations. If, as a parent, you see your child joining climate change marches, you’ll probably start thinking about the future. This growing awareness is also raising more and more questions. It’s not a simple topic. Take nuclear power, for example: should you invest in it or not? There’s no clear answer to this. The key message is to find the right partner to discuss the pros and cons and seek guidance from them.
