In responsible investment terms, Germany is a contradiction. The country, considered by many as one of the cradles of environmentalism, is a long time champion of domestic recycling and one of the world’s most prolific builders of sustainable housing. Yet German institutions are amongst the European laggards in adopting environmental, social and governance approaches into investment.
By contrast, German Chancellor Angela Merkel, a former environment minister, has been a driving force behind EU efforts to cut greenhouse gas emissions and switch to renewable fuels. A recent update on a 2005 report by SD-M, Sustainable Development Management, in conjunction with Swisscanto, the Swiss fund manager, found little change to its original findings that just one in 20 German pension funds had a “very good” understanding of sustainable investment. This despite 65% of German investors telling the survey they now believed the return potential of sustainable investments was similar to that of conventional strategies. The lack of SRI take-up so far by German investors comes despite the integration of sustainability reporting for pension funds in the 2005 Act on the Supervision of Insurance Companies. The SD-M report said there were notable German SRI exceptions.These include the €260m ($383m) Gothaer Pension fund, The €134m Gerling pension fund, the €49m Hannoversich pension fund, the Hamburg Mannheimer pension fund, the Victoria Pension fund and Metallrente, the pension fund for the German metal industry. Metallrente is one of Germany’s fastest growing pension fund managers with more than 250,000 members and over 13,000 constituent companies. The fund runs €1bn plus in contributions, diversified across insurance companies and asset managers. Capital is expected to grow by some €300-400m per annum. Launched in 2002, MetallRente offers three forms of pension administration: equity-oriented pensionsfond DC plans, direct insurance (direktversicherung) and a Pensionskasse, a traditional German insurance-linked DC fund. Heribert Karch, managing director at Metallrente says it focuses on SRI in its equity-based pensionfond plan, where the system most resembles an Anglo Saxon pension fund arrangement and SRI can be bolted on. Metallrente is no stranger to SRI though, particularly in social matters, which is seen as important as environmental issues in a traditional blue-collar industry where social partners – employers, employees and trades unions – have input into the fund’s investment decisions.
Until 2006, the fund ran a negative screen to remove companies whose shares it didn’t wish to buy. Its strategic asset allocation was decided and stock selection filtered on a confidential basis; indicative of the tension that can arise in industry over such issues. During 2006, Karch says the fund decided to simplify its SRI approach and run investments against an SRI benchmark, the Dow Jones EURO STOXX Sustainability Index. He explains: “Fundamentally, this made the process of discussion between the social partners on sustainability much easier. We don’t just invest in the index though. We also carry out additional stock screening because there may be companies that are environmentally friendly but which we feel are not so socially friendly. By the same dint there are some stocks that we might want to add to the universe and we have done this also because we have a particular view on what they do. We feel we have introduced a good balance of sustainability concerns with investment pragmatism.”
In a sign of its forward thinking on the relationship between ESG issues and investment, last year Metallrente became the first German institution to join the Enhanced Analytics Initiative. The fund’s sustainability slant is confined to European equities, however. Bond allocations are also exempt, although the fund is heavily biased to equities at 79-80% of the total portfolio. Karch says MetallRente will examine sustainability issues regarding overseas equities and fixed income in the future. He is also confident that SRI is a growing trend in Germany, albeit slowly. “Both for ourselves and for other German funds, sociallyresponsible investment is a political process and there is therefore a necessary learning process. We are one of just a few German institutional investors that have really made any moves in this area, which is partly as a result of the co-determination structure of funds here.”
Karch believes that as German pension reserves depend more on capital markets and less on the pay-as-you-go system, then the resulting funded schemes will develop in terms of engagement: “In Germany we had €330bn of assets in book reserves for pensions and now the big change is to take that off the balance sheet and to outsource it to asset managers. This growth has increased interest in how those assets are managed and how they this can be done on a sustainable basis with good corporate governance. It’s something you can’t really steer through a supervisory board.”
Lack of clarity over executive pay in Germany, as well as some of the more salacious scandals that have rocked German companies such as Volkswagen in recent years, indicate that the trend will be a welcome one for investors.
Karch says: “Social issues have tended to be sorted out by management/union consensus, not via shareholder pressure. You have to remember that stakeholder capitalism is a very recent concept in Germany, as is the second pillar style of pension fund investment, so it hasn’t been so important either. There is a growing awareness now though about the power that investors can leverage over the companies they invest in and what this can achieve in terms of transparency and accountability.”