“In our view it is difficult to attribute any effect on alpha generation by focusing on ESG issues. Our primary reason for focusing on these issues is to enable us to better manage our risks by reducing volatility and generating better riskadjusted returns.”
Andreas Hallermeier (Sustainability Manager and Assistant to the CIO, Bayerische Versorgungskammer (BVK))
Drivers for Action
It is important to recognise that some German investors have made commitments to responsible investment and seventeen asset owners have signed the PRI. This suggests that the current German regulatory framework is, at the least, not an obstacle to organisations that want to adopt a responsible investment approach. However, interviewees were clear that, in the absence of explicit legislation requiring ESG integration or formal legal opinion that establishes the principle that ESG integration is required, significantly increasing the number of institutional investors with commitments to responsible investment is likely to take a long time. They were also clear that self-regulatory initiatives (e.g. a German Stewardship code along the lines of those developed in the UK and Japan) are unlikely to make a substantial difference.
Interviewees cautioned against relying too much on changing German legislation, given that changing legislation is likely to be a slow process. They did suggest that European legislation, in particular the Shareholder Rights Directive, offered the potential to accelerate the process of change, given that this legislation needs to be adopted into German law.
Barriers to Progress
Interviewees were clear that the primary barrier to progress in Germany is the absence of formal legal requirements on asset owners and insurance companies to (a) examine long-term investment value drivers (including ESG issues) in their investment processes, (b) engage with the companies or other entities in which they are invested.
Some interviewees also pointed to weaknesses in the evidence base for responsible investment. They pointed, in particular, to the lack of robust evidence on the relationship between ESG issues and investment performance, and the lack of evidence that ESG integration or active ownership add value to investment performance.
A number of interviewees expressed concern about the ESG-related capacity, expertise and resources of German investors, although they acknowledged that this was probably a reflection of the relative lack of demand for responsible investment. They suggested that, if market demand was stronger and the investment case for responsible investment clearer, any capacity gaps would probably be addressed relatively quickly.
In addition to the global recommendations, we recommend that:
Bundesanstalt für Finanzdienstleistungsaufsicht (BaFiN)
The federal government and the governments of the provincesBundesanstalt für Finanzdienstleistungsaufsicht (BaFiN) should require pension funds, pension institutions and insurers to:
- adopt publicly available policies that explain how they address ethical, social and environmental concerns in the allocation of pension contributions;
- publish a public annual report describing how these commitments have affected the actions taken and the outcomes achieved (where the outcomes relate to both investment performance and to the ESG performance of the entities in which they are invested).
Pension funds should publicly commit to responsible investment.
The European Commission
The European Commission should provide guidance to the competent Member States authorities on how they should interpret fiduciary duty in the national legal context. This guidance should:
- Clarify that fiduciary duty requires asset owners to pay attention to long-term factors (including ESG factors) in their decisionmaking and in the decision-making of their agents.
- Clarify that responsible investment includes ESG integration, engagement, voting and public policy engagement.
- Encourage Member States to ensure that fiduciary duty and responsible investment-related legislation is harmonised and consistent across Europe.
- Encourage Member States to monitor the implementation of legislation and other policy measures relating to fiduciary duty and responsible investment, and report on the investment and other outcomes that result.
Fiduciary duty in the 21st century
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Country analysis: Germany