Asset and Portfolio Management

Is ESG the new X-factor in investing?

It's been around for just 15 years, but responsible investing has already become a megatrend that's getting increasingly tough to ignore. It was only in 2005 that the United Nations established the Principles for Responsible Investing (PRI), but already investors with more than EUR 80 trillion in assets have made their commitments to the PRI. Investment banks and asset managers have a key role to play in engaging with corporations, which have also had to focus more on ethical behaviour due to active voting at general meetings by activist investors. Perhaps Larry Fink, the CEO and chairman of the world’s largest asset manager Blackrock, said it best in his 2018 annual letter: 'Contribute to society or risk losing our support.'

Improvements in modern environmental technology are also creating investment opportunities for those looking to dip a toe into ethical assets. It's worth highlighting a few of the most exciting opportunities out there: 

  • Renewables: Falling costs for solar and wind have led to increased deployment of renewable power generation compared to natural gas and other traditional sources. Most investors wish to exclude coal mining and power generation from their investment universe, and indeed coal power generation is losing ground to cleaner energy sources in most parts of the world.
  • Smart agriculture: Some three quarters of the world's food comes from just 12 plants and 5 animal species, so making improvements to just one of these has a huge global effect. Smarter farming should reduce the carbon footprint of our food and reduce the use of pesticides. Lab-grown meat could also cut the environmental cost of producing meat.
  • Advanced building technologies: Smart meters deployed in homes and offices will improve efficiencies in terms of heating and lighting. For example, LED lights use 75% less energy and last 25 times longer than traditional bulbs.
  • Water and waste treatment: Some 30% of the global population lack safe and reliable drinking water while 4.5 billion people don't have safely managed sanitation. Water and waste management companies can use technological innovation to provide solutions for better treatment and recycling of water as it becomes a scarcer resource in many parts of the world.
  • Recycling and pollution prevention: Increased use of biodegradable plastics for packaging will shrink the amount of plastic waste currently produced. Environmentally friendly packaging for food and consumer goods is poised to change the packaging industry dramatically in the near future.

One big question that investors have to ask themselves when considering an ESG strategy is whether they will have to give up returns for investing responsibly and limiting their investment universe to those assets that can be considered a more ethical choice. You would think the answer would be a clear yes as, all other things being equal, limiting one's investment universe would be highly likely to lower returns. That said, it's possible that all other things are not equal; several studies have suggested that companies which score highly on ESG and responsible parameters have been better placed to adapt their business to a changing market, benefiting not least shareholders. So the answer is less clear cut than standard finance theory initially suggests. Indeed, it's becoming more unusual not to have some kind of ESG element in an investment strategy. Pension fund policyholders, among others, require active ownership by their pension fund, and not being invested in a responsible manner seems like an unreliable business plan. So, while it's relatively new, it's increasingly popular: ESG investing might have some of the star qualities that today's X-factor generation demands.

Commerzbank has an obligation to act responsibly, in both economic and sociopolitical terms, in the areas where it has an influence. It respects the rights and expectations of its various stakeholders and of society at large, and ensures they are factored into company decisions. 

In the light of this responsibility, the Bank is committed to the UN Global Compact and has adopted positions and policies concerning environmental and social issues. You can find all positions in the Commerzbank policy framework for handling environmental and social risks at:

Sustainability Standards