German state makes major asset sales to meet sustainable investing law

Baden-Württemberg completes sale of 41 securities from active portfolios, work on Paris-alignment of investments continues.

picture of heidelberg

The German state of Baden-Württemberg has completed the sale of a significant chunk of its portfolio in order to comply with a new sustainable investment law.

The state switched its equity investments, which are passively managed by the Bundesbank, to Paris-aligned benchmarks (PABs) in March last year and completed the sale of around 4 percent of its active portfolio by end-December.

The law includes wide-ranging exclusions and alignment targets for state investments, including bans on investment in fossil fuels and controversial weapons, as well as aligning portfolio emissions with the levels set out in the EU’s Paris-aligned benchmark regulation.

It was introduced to implement an item in the coalition agreement between the state’s ruling Greens and the Christian Democratic Union, which called for alignment of public investments with the UN SDGs, Paris Agreement and EU taxonomy.

The switch of around €2.4 billion to PABs resulted in the sale of 30 out of 120 stocks, representing around 9 percent of total assets. The sales were not solely due to climate concerns as there were also some technical updates to the index methodology.

The passive investments previously used ESG indexes developed with other German states, but have now been moved to the stricter PAB methodology.

The active funds sold 41 securities, mainly due to violations of the UN Sustainable Development Goals. A carve-out in the law allows the state to avoid selling assets at a loss, but market timing meant that all violators could be sold at a profit.

The volume of sales were below initial estimates, which suggested that Baden-Württemberg might have had to exit up to a fifth of its assets.

The active portfolio is also subject to emissions-intensity criteria and will continue to be optimised on these grounds in 2024. The portfolio must have a 50 percent lower intensity than its benchmark and decarbonise 7 percent year on year, but also meet a similar sector allocation to the benchmark.

The sales were made from Baden-Württemberg’s pension and pension reserve funds, which total around €10 billion. A further €7 billion in assets managed by other public institutions is also subject to the law.

The law includes wide-ranging exclusions and alignment targets for state investments, including bans on investment in fossil fuels and controversial weapons. Sovereign bonds issued by states that have not ratified a series of international treaties are also excluded.

Finland was the only government in the portfolio which failed to meet the criteria, having failed to ratify a UN convention on cluster bombs. As a result, one of its bonds was sold.

Baden-Württemberg has contracted with ISS ESG to provide data for the exclusions list, as well as allowing the finance ministry to analyse sustainability data independently of asset managers or index providers.