Investing sustainably: Green investment or greenwashing?

Green financial products – greenwashing or genuine?

There are now sustainable product variants in all asset classes. However, there is no minimum standard that could serve as a basis for assessment. In short, every provider can offer something different as a sustainable, green or ethical-ecological investment. It is up to the investor to be aware of what he or she understands by sustainability and wants to support, and to obtain comprehensive information about the desired product and its sustainability standard. One way to find your bearings is the so-called ESG standard.

But what does the ESG standard actually mean? When evaluating an investment such as shares or an ETF with regard to the fulfillment of sustainability criteria, it is advisable to use the ESG standard as a rough guide to possible criteria. Before we go into the presentation of specific options for green investments, we will first start with an overview of the ESG standard (Environmental – Social – Governance).

Definition of ESG standards

The ESG standards were created to guide decision-makers in companies to make sustainable decisions and implement a responsible management culture. The aim is to ensure that a company is managed in an environmentally, socially and responsibly responsible manner. The acronym ESG stands for:

• Environmental
• Social
• Governance

The “Environmental” area covers all factors that affect the environment. Investors can ask themselves the following questions: How can I use renewable energy in my investment? Can emissions be reduced? What climate strategy do I want to pursue?

The “Social” section deals with social issues. In relation to a property, equal opportunities in the selection of a suitable tenant comes to mind here.

“Governance” relates more to corporate management and is difficult to apply to real estate, but works better with shares. It is primarily concerned with risk management, transparent corporate governance and anti-corruption guidelines.

It is precisely these criteria that are becoming increasingly important. And this not only applies to the management of companies, but can in principle also be applied to other areas such as choosing the right investment.

Criteria for green investments

Investment approach

The following distinction can be made depending on whether the approach is geared more towards prevention or promotion. Of course, mixed forms also frequently occur in practice.

Exclusion criteria (negative criteria):

The focus is on the decision to completely exclude certain companies or sectors. These can be, for example, companies in the nuclear energy, coal, oil, weapons or tobacco sectors. Companies that permit forced labor, child labor or labor rights violations, for example, are also out of the question.

Targeted investments (positive criteria)/ thematic funds:

Here, investments are made explicitly in companies that operate sustainably (e.g. in the field of renewable energies, organic farming, education) or have a particularly strong social commitment.

Best-in-class: What counts is the answer to the question:

Who acts the most sustainably of all those in the industry? In addition to the greenest car manufacturer, for example, we are also talking about controversial industries such as the oil, nuclear or arms industries. Consequently, the sector itself does not necessarily have to be sustainable.

Engagement:

Financial providers want to play a progressive role in corporate policy either through direct dialog or through their voting rights as shareholders.

Risks and problem areas

Every investment approach has its advantages and disadvantages. The so-called positive criteria are often defined very differently with regard to the understanding of sustainability.

• Too strong a focus on a single, specific sector with an increased risk of loss and fluctuation can be the result if diversification is neglected.
• The scope for interpreting negative criteria can differ greatly from consumer expectations and thus lead to inconsistencies.
• Even if a company is committed to good working conditions and fair wages, for example, the importance it attaches to environmental friendliness may differ greatly from its own expectations.
• You should therefore do your best to check whether the company’s understanding of sustainability corresponds to your own attitude.

Various assessments by rating agencies

As it is often difficult for consumers to assess what is actually sustainable, certain rating and research agencies have specialized in evaluating companies according to the ESG approach. These ratings are seen as a helpful guide for investors.

Different impact channel/ impact investing

The aim of impact investing is to encourage companies to act sustainably. It combines financial returns with an ecological or social impact. The capital invested supports specific sustainability projects that solve a social problem, e.g. in the areas of poverty reduction, renewable energies, green technologies, agriculture or reforestation.

Greenwashing risk

The term “greenwashing” comes to mind here. In greenwashing, financial products are described as sustainable/green, even though they finance or include components that are harmful to the environment or climate. Important parameters that can help to better assess the situation:

• What sustainable goal can be achieved through the investment?
• What exactly does the capital investment achieve? Does the money become part of the cash flow in the real economy or does it merely remain in the financial economy?
• How transparently is sustainability communicated to the consumer?

Green investments: possibilities

What specific investment options are there?

Shares and ETFs (rating: 2/5)

Shares as a sustainable investment

Shares and ETFs are a useful way of investing sustainably. However, these options are few and far between:

• Individual shares, i.e. individual companies that both fulfill all sustainability criteria and generate good returns, are extremely rare; if you find one, you are faced with the next problem: because it is not advisable to focus your investment on a few or even just a single stock. The magic word is diversification, i.e. spreading the investment risk across as many companies as possible. Diversification can be based on a wide variety of criteria such as geography, sector, etc.
• Sustainable ETFs can solve this problem. However, ETFs are associated with costs, the so-called TER (=Total Expense Ratio). The more individual the stock selection of an ETF is, the more expensive it is.
• Example: An ETF based on a broad index such as the German share index (DAX) costs less TER than an ETF that specifically selects shares with a focus on sustainability. The “iShares Core DAX UCITS ETF (DE)” costs just 0.16%, while the ETF “Deka Oekom Euro Sustainability UCITS ETF“, which specializes in sustainability, costs a whopping 0.41% – almost three times as much!

Real estate as a capital investment (Rating: 4/5)

Real estate as a sustainable investment

A property as a capital investment offers attractive options for structuring your own investment in a sustainable way. Contrary to popular belief, real estate investors are not exploitative large-scale investors. You have the opportunity to make your own contribution and, for example, to structure a property as a sustainable investment in such a way that you can sleep with a clear, green conscience.

a) Ecological aspects

In order to manage your investment property (= rented condominium) ecologically, you can use renewable energies. This starts with the installation of energy-saving technology or water-saving modules. You can also select a sustainable electricity provider and purchase green electricity (or make this a criterion when selecting tenants).

Various sustainable banks are available to you for green construction/conversion projects, through which you can obtain favorable construction financing. If you request a financing comparison from us, we can select the bank that best meets your sustainability criteria from 500 banks.

In addition to renewable energies, there are other ways to use resources as sparingly as possible. These include sustainable furniture and sustainable building materials. Good thermal insulation also ensures that less heating is required. This also saves resources. If you decide to renovate your property sustainably, you can have floors made from sustainable building materials, for example.

We have already supported many sustainably-minded customers in their projects and implemented the corresponding measures for them. The property is suitable as an ecological capital investment in a variety of ways and we will be happy to help you with the planning. Or we can find the right sustainable investment property for you, which you can then rent out (you can contact us here).

b) Ethical aspects

Ethically responsible real estate management primarily involves ethical conduct towards the tenant party. This starts with a fair selection of the tenant. The key word here is equal opportunities. As an investor and landlord, you can decide for yourself who gets the apartment.

Usually, the people with the best credit rating are given a tenancy agreement. If you want to act ethically as a landlord, give all applicants the same chance. Another way to turn your property into an ethical investment is through health protection. For example, you could offer housing to people with health problems.

c) Social aspects

A property can also be a social investment. Rents have risen sharply in recent years. If you rent out your property at a fair price, you can fulfill your social responsibility as a landlord.

Our clients buy off-market properties below the usual market value, so there is potential for socially responsible letting without having to sacrifice too much return.

You can also view your real estate investment as a savings plan by saving a certain amount of your monthly rental income or investing it elsewhere. An alternative social investment could therefore be to grant microloans from your rental income, provided that a positive cash flow is achieved. To calculate the cash flow, take a look at the example calculation for a property as an investment.

Sustainability vs. high returns: is there a compromise with real estate?

Unfortunately, the return on a sustainable real estate investment may be somewhat lower. There are certainly investors who prefer to forego the sustainability of the property in such a case. However, you don’t always have to choose between yield and sustainability. You can include your investment property in your portfolio as a security component and also invest in something social, ecological and/or sustainable.

Options for such an investment include solar panels, green shares, green ETFs, reforestation, etc. More and more people are now also investing in offshore wind farms, which produce clean electricity using wind power from the sea. This allows you to combine two investment goals: generating good returns and doing something socially and environmentally beneficial at the same time.

Conclusion: investing green

An investment property can meet all ESG standards. From a resource-conserving approach to ethical and ecological approaches, a property offers all possibilities – making it the best investment at the moment.

If you attach great importance to sustainability in your real estate investment, please let us know when you contact us so that we can find the right property for you and develop an appropriate strategy together with you.

As there are different types of customers, a thoroughly developed strategy is extremely important. While one investor focuses on a high return, another investor places more value on security or sustainability. Together we can find out which strategy is right for you. Simply contact us using our contact form and you will receive a quick response to your questions.