Green ETFs – The next hype or real future opportunity ?

At the latest since the climate protection movement “Fridays for Futures” gained massive global momentum in 2019, the topic of sustainable investment has also become an increasingly important issue for financial service providers, investors and the wider society. Just this month, Greenpeace drew attention to this again when activists landed a paraglider on the roof of the European Central Bank to protest for a greener monetary policy.

But what is actually a truly green investment and what should you look out for before making a
Pay attention to investing ?

A sustainable investment is often equated and described with the term “ESG compliant”. ESG stands for Environmental, Social and Governance and thus describes the factors that need to be taken into account when investing sustainably. For example, the environmental point is about whether companies produce in a climate-neutral manner, handle rare resources responsibly or minimise harmful effects on water, soil and air. Social describes the social impact that the work of a group has.

Here it becomes important, for example, whether measures are taken against child labour or whether companies are active in areas that are harmful to society, such as the arms and tobacco industries. Finally, there is the criterion of governance, which comprises measures in the internal structure and management of companies.

Green ETFs - The next hype or real future opportunity?

Is there a gender mix on the board? What is the relationship between the salary of the executives and that of the employees ? Are there compliance structures in place to prevent corruption ?

No large, publicly traded company can be perfect on each of the three counts. However, it is important that serious and sustained steps are taken to make significant progress in all areas. However, even in the case of green ETFs, the increased demand for sustainable financial products inevitably attracts players who do not take climate protection so seriously after all. To put it vividly, some of the “green funds” offered on the market have as much to do with climate protection as a green-painted long-haul aircraft. In this context, green ETFs that are seriously launched and managed today would be indispensable in order to achieve the Sustainable Development Goals defined by the UN, such as “Affordable and Clean Energy”, “Zero Hunger” or “Responsible Consumption and Production”, through “Impact Investing”.

But does this mean that environmentally and socially responsible investing with ETFs remains purely theoretical wishful thinking? Not at all, there are a number of genuinely sustainable products from a wide range of suppliers. You just have to know how to distinguish them from “greenwashing” offers.

In this regard, one must first be aware that terms such as “ESG-compliant”, “green” or “sustainable” are not yet protected designations, although regulation is currently being intensively discussed at EU level. Until there is a fixed legal framework, however, it is all the more important to always take a look at the individual fund components of allegedly sustainable ETFs and to question what exactly is being invested in.
will. Unfortunately, potential investors will often find that their composition does not really differ from the normal products of well-known issuers. Depending on the type of ETF, it is therefore necessary to pay attention to various points in order to determine whether one is making a real difference with one’s investment or whether one is falling for a sham.

Green ETFs - The next hype or real future opportunity?

Before investing in equity ETFs, investors should find out what criteria the respective provider uses to assess and ensure ESG compliance. Many limit themselves here merely to the exclusion of companies that are particularly harmful to the climate. While this is a first approach, it is not yet truly sustainable.

It is better to ensure that a “best-in-class” approach is taken when selecting companies and that a “low carbon filter” is applied. Through this approach, only those companies from each asset class are specifically included in the ETF that have the best performance measured against the ESG criteria. A “low carbon filter” then excludes companies that have a particularly high carbon footprint compared to the rest of the group. However, since these approaches and filters are also designed by the individual providers without regulation and on their own responsibility, a comparison of the different concepts should be made before an investment is made.

In the case of a bond ETF, investments in development banks and “green bonds” are
promising evidence that this is indeed sustainable. Here it can be assumed that the money will be used to promote new, climate-friendly innovations or aid projects in developing countries, for example. The last point in particular is a fact that is unfortunately often overlooked. As already mentioned above, sustainability does not only refer to the aspects of climate friendliness and environmental compatibility, but also addresses ethical and socio-economic issues.

Here, for example, care should be taken to ensure that a commodity ETF only invests in precious metals where not only the mining process is environmentally friendly, but also the workers are paid fairly and no child labour is used. This is independently certified, currently only the case with gold.

Which is why you should be wary of mixed commodity ETFs that advertise ESG compliance. Investors in green real estate ETFs should also look for independent certifications that attest to the fact that the listed real estate companies construct and maintain their buildings in a sustainable and, above all, energy-efficient manner.

“You should be wary of blended commodity ETFs that advertise ESG compliance.”

In summary, investing with sustainable ETFs, carefully executed, offers the opportunity for stable and inflation-protected wealth accumulation while supporting solutions to climate and societal challenges worldwide. However, investors should always compare for themselves and not be blinded by a green facade. Just like at the beginning of the Bitcoin hype, when blockchain offerings suddenly sprouted up everywhere, even with supposedly ESG-compliant ETFs, sustainability is not always in where sustainability is written.

Lars Reiner ist Geschäftsführer des digitalen Vermögensverwalters Ginmon. Zusammen mit seinem Frankfurter Team beschäftigt sich der ehemalige Deutschbanker unter anderem mit nachhaltigen Investmentstrategien und der Möglichkeit, Vermögens-aufbau und Umweltschutz sinnvoll zu kombinieren. mehr