Private bank Metzler sees ESG integration going mainstream in Germany

CIO Rainer Matthes: Everyone will follow our example

Bankhaus Metzler, the German private bank which is a signatory to the Principles for Responsible Investment (PRI) with €62bn in assets, believes that over the mid-term, integration of ESG (environmental, social and governance) factors will become standard practice in Germany’s investment industry.

“I’m sure that when we meet ten years from now, everyone in German asset management will follow our example and analyse firms according to their ESG performance,” said Metzler Chief Investment Officer Rainer Matthes at a journalists’ workshop in Frankfurt. “Such an approach makes perfect sense, as it enables a smart stock picker to get a better handle on corporate risk. That, in turn, helps you generate alpha (market outperformance).”

In Germany, a total of 29 asset managers, including Metzler but also big players like Allianz Global Investors (AGI), Deutsche Asset Management and Union Investment, have embraced the PRI. Relative to the entire Germany’s entire assets under management (AuM), however, pure sustainable investments make up less than 2%. Union is the market leader with €10bn managed this way, while Metzler has €1bn managed sustainably.

At the workshop, Metzler – which traces its roots to 1674 – illustrated its sustainable approach by way of its recently launched ‘Dividend Sustainability’ fund. The first step is to apply ethical exclusions. For Metzler, these include essentially all weapons, not just controversial ones like cluster bombs, as well as nuclear energy. Tobacco, gambling and pornography are also typically excluded.Then with ESG data supplied by MSCI and oekom research, Metzler whittles down the number of European companies Dividend Sustainability invests in to a maximum of 60. By comparison, the relevant benchmark MSCI Europe has 441 companies – though the market capitalisation of those in the Metzler fund is only around €15bn lower.

Moreover, the key financial data for the companies in Dividend Sustainability – e.g. price-to-earnings ratio, return on equity and operating profit – were similar to those in the MSCI Europe index. “This shows that by integrating ESG you do not necessarily arrive at different financial fundamentals,” said Matthes. The fund’s performance, while negative owing to the recent equity market decline, has also been slightly one-percentage point better than the MSCI Europe.

To keep tabs on ESG risk in the portfolio, Metzler has developed a ‘traffic light’ system for investee companies. Green means the company adheres to Metzler’s ESG standards, based on the UN Global Compact and the International Labour Organisation. Yellow means that there has been a violation and Metzler or its agent, BMO Asset Management, will engage with the company on the issue. If the sign turns to red, the violation has not been resolved, and Metzler divests the company.

As a PRI member, Metzler has also been involved with other institutional investors in three thematic engagements this year (palm oil, human rights in the extractives industry and legal minimum wage).