Financial industry overview
Although only one German bank ranks among the 25 largest banks in the world, the German banking industry is one of the largest in the world and the financial sector constitutes 4% of the country’s 2015 GDP.
The German finance industry is highly diversified and home to more than 361 asset management companies. The market is largely driven by the public sector and cooperative banks. The German fund industry managed €2.6 trillion as of December 2015. €378 billion of this was collected as assets outside investment funds, while retail funds and mandates accounted for €883 billion and €1.3 trillion respectively. Insurance companies continue to be the largest investor group for mandates, making up just under 48% of all AuM, or €530 billion. Fund companies are managing a further €276 billion for retirement benefit schemes, such as pension funds. Since the end of 2009, equity funds have been the largest group among retail funds in terms of volume. Since then, their AuM grew from €180 billion to €322 billion. This equates to a current market share of 36%.
Characteristics of the SRI market
All three pillars of the German banking industry – public-owned as well as private and cooperative banks – are important with respect to the SRI market. The government-owned bank KfW is active in the field of sustainable investment. Several private banks, including the market leaders, offer a broad variety of SRI products.
A few other SRI specialised fund management companies are less important in quantitative terms but vitally important with regard to standard setting and best practice.
Another characteristic of the German SRI market is the high amount of sustainability-oriented specialist banks in Germany, which play an important role within the German sustainable finance and investment market. These include players such as Triodos, Umweltbank, GLS-Bank, Bank im Bistum Essen, DKM Münster, Bank für Kirche und Caritas, Evangelische Bank, Bank für Kirche und Caritas, Bank für Kirche und Diakonie and Bank für Sozialwirtschaft. Some of these contributed decisively to the development and promotion of SRI in its early days, dating back to the last century. They play a significant role in the financing of companies, projects and initiatives that contribute to sustainable development. Moreover, they employ a broad set of ethical criteria in their investment decisions that comprise Exclusions as well as ESG screenings.
SRI Market and strategy overview
The overall outlook across SRI strategies in Germany is very positive and made of double- and triple-digit growth. In the case of Engagement and Voting, we have a CAGR of 65% this year, an outstanding result considering that the CAGR in the previous review of just above 20% was already remarkable.
The overall market share in Germany for funds and mandates is at 2.7%, but it has to be noted that asset overlays are not counted.
In this year’s review, the total figure for Exclusions is €1.8 trillion. This figure includes criteria especially applied to funds and segregated mandates (product specific), which totals €44,884 million, plus exclusions applied as asset overlays to product ranges.
Since the inception of SRI in Germany, the country’s main sustainable investment approach has been the application of Exclusion criteria. These are mainly focused on weapons (both production and trade), violation of labour rights, violation of human rights, environmental damage, and corruption. In the past two years, ESG integration has become the second most important SRI Strategy.
The non Product-specific Exclusions are usually anti-personnel mines and cluster munitions.
The Best-in-Class approach in Germany has gone from being the second most important sustainable investment strategy to this year being the seventh in terms of growth. Nevertheless, it still registers an important growth of 33% this year and a CAGR of 15%.
The main drivers for this category are demand of institutional investors, legislative, and external pressure (NGOs, media).
Impact Investing is largely driven by two specialised players, who represent 81% of the AuM for this strategy. Microfinance still features as one of the main categories of investment, representing 75% of all the categories looked at.
The main motivators for Impact Investing are linked to the wish to contribute to sustainable development and local community development – very much in line with the drivers linked to these strategies.
Another related category of investment which also closely monitors impacts is Sustainability Themed investment, and it has grown by 98% since the previous review with a CAGR of 41%. Renewable energy and energy efficiency are the most popular categories of investment. This is fitting, considering Germany’s position as the second biggest player in the European market for investment in renewables, which reached $8.5 billion in 2015. This is closely linked to Germany’s Renewable Energy Act (Erneuerbare-Energien-Gesetz, EEG), which first came into force in 2000 and has since been continuously revised. The act promotes the generation of electricity using renewable energy sources. The initial goal of the EEG was to facilitate market entry for new technologies – such as wind and solar – through fixed payments, guaranteed purchase, and preferential feed-in. The EEG created the basis for the development of renewables in Germany and their transition from niche to a key pillar representing 25% of the German electricity supply. However, this exponential growth also resulted in an increase of the EEG levy. A reformed version of the EEG came into force in August 2014. The main objectives of this reform were to put a halt to cost increases, to steer the further development of renewables, and to better connect them to the market.
An important development in 2015 was the launch of a new quality label for mutual funds, the FNG Label for sustainable mutual funds, audited by Novethic. In Germany, no new formal SRI initiatives have been launched since the last edition of the SRI Study. However, the strong focus on ESG consideration on the part of the banking and investment sector are still worth noting. Nearly every important financial industry organisation has implemented taskforces on sustainability. For instance, the BVI, the largest asset management association, launched a voluntary guide for SRI as early as 2012, and in 2015, the GDV – the German Insurers – followed suit. Furthermore, foundations continue to be engaged in SRI. The church is traditionally active in this field, and after the launch of the Guideline “Leitfaden für ethisch Nachhaltige Geldanlagen in der evangelischen Kirche” in 2011, they published a renewed version in 2013. The Catholic Church – Deutsche Bischofskonferenz (German Bishops’ Conference) und Zentralkomitee der deutschen Katholiken (ZdK- Central Committee of German Catholics) – followed in 2015 with its guide “Ethisch-nachhaltig investieren”.
No specific regulation on SRI or CSR has been enforced since the previous edition of the Eurosif SRI Study. There was nevertheless an update, as reforms of the Renewable Energies Act are being made. By the end of 2016, the EU-Directive on disclosure of non-financial and diversity information by certain large undertakings and groups will be implemented in German law.
German authorities are taking important steps to implement strategic sustainability goals in the financial sector. The UN Sustainable Development Goals as well as the targets of COP-21 in Paris are increasingly focusing on the financial sector.
As in previous years, survey participants from Germany see institutional investors as key drivers to SRI market growth over the next few years. Today, institutional investors represent 85% of the total AuM invested in SRI. Other main drivers for SRI are legislation and external pressure from NGOs, media and other stakeholders. As for the types of institutional investors, public pension funds play the most significant role with a share of 48%. They are followed by religious institutions and charities, at 24%, and foundations, at 12%.
With respect to asset allocation, the importance of bonds decreased. Their market share went from 48% in 2013 to 31% in 2015. Conversely, equity gained market share in 2015 (44% compared to 30% in 2013).
The following years could see an increase in new activities developing around SRI. In particular, the 2015 Paris Climate Conference raised awareness of green finance and both investors and authorities have begun to react to the risks and opportunities posed by climate change.
Chancellor Angela Merkel mentioned the importance of sustainable and responsible investments in a welcoming address to the Council for Sustainable Development.