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On January 25 news of the fatal Brumadinho dam disaster in Brazil broke. Days later Union Investment’s ESG committee met and subsequently sent a letter to the dam’s owners Vale. In March, the German giant divested its stake after receiving an unsatisfactory response from the mining firm.
This prompt reaction to one of 2019’s most devastating corporate ESG scandals illustrates Union Investment’s stringent approach to engagement.
Speaking to Responsible Investor, Alexander Schindler, executive board member at the €349bn Frankfurt-based firm, says it was one of the first investors in Germany to actively engage with corporates.
There is UnionVoice, its in-house engagement service for its institutional clients. Union Investment is a lead investor in Germany on the investor engagement body ClimateAction 100+.
It has established corporate governance rankings for Germany’s DAX 30 companies and the STOXX Europe 50 companies.
The approach evolved in the 1990s when Union Investment’s religious and charitable foundation clients started to ask for sustainable and ethical investment.
“Germany’s Catholic and Protestant churches pushed us to integrate ethical aspects in to their capital market investments in the 1990s. When at the same time they were launching ethical products for their employees and for retail customers of their banks,” says Schindler.
“That’s really when it started off and from there we started developing the concepts, the products. Introducing ethical, social environmental and in particular governance aspects.”
Along with strong engagement with corporates, Schindler says Union Investment also engages with governments on issues like corruption, as it has substantial holdings in government and sovereign bonds (€34bn out of its total assets under management).
Union Investment has written a number of papers on the issue with Schindler saying, “not so long ago, government bonds for institutional investors were considered a popular and safe asset class with a yield which could be forecast at any time…..a series of developments culminating in the eurozone crisis has now shattered this confidence”.
Union Investment, Germany’s third largest asset manager with a market share of 15.3% in the country, was also an early signatory to the PRI, and was a vocal advocate for the country’s institutions to adopt the principles.
The PRI was founded shortly before the 2008 financial crisis and “that really marks from my point of view the change in the global assessment of priorities to investing and whether it is just to optimise wealth,” says Schindler. “With the loss in the trust in the financial industry there has been a major shift. People have become more aware of the impact of good governance on corporates.”
The 2015 Paris Climate Accord also marked a change for the financial industry, according to Schindler. After the agreement, Union Investment started to incorporate energy efficiency approaches across its €45bn global real estate portfolio.
“Real estate is a very prominent asset class among German retail investors as well as institutional investors,” says Schindler. Union Investment plans to make its real estate portfolio CO2 neutral by 2050.
RI speaks to Schindler at Union Investment’s eighth annual sustainability conference. In 2012, it had less than 30 attendees. By contrast, this year’s event, had almost 10 times that number — and speeches from leading climate economist Lord Stern and Germany’s former federal president, Dr. Joachim Gauck.
This was backed up by Union Investment’s survey of German institutional investors released at the event which found that 72% of them now consider sustainability criteria.
Carbon pricing was a key topic at the event. Schindler, like many major investors, wants a global carbon price and Union Investment was a signatory to a recent investor letter
to the G20 calling for it.
On engaging with policymakers, Schindler, who from 2015 to 2017 was president of EFAMA, the European Fund and Asset Management Association, says: “We talk to the European Commission, to the European Parliament. Because we feel it is extremely important to enter into a permanent dialogue with politicians and lawmakers.”His reflections on recent European legislation aimed at the finance industry are marked by scepticism: “There is the Capital Markets Union (ongoing EU legislation aiming to integrate Europe’s capital markets) with a lot of initiatives geared towards the asset management industry. But quite frankly it’s not optimal.”
Schindler says that the ultimate aim of redirecting capital is not happening as “the guidelines under these initiatives are so specific which ultimately makes them unattractive for any investor”.
He cites the European Long-Term Investment Fund (ELTIF) structure: “Have you heard of even one product being launched over the last three years?”
In fact two ELTIFs have launched recently, but there is no central registry of ELTIFs, as is the case for other European fund structures.
The wide-ranging EU Action Plan on Sustainable Finance is part of the Capital Markets Union project (link to RI coverage). Schindler describes it as a “prudent programme” in general, but remains cautious.
“Not that many [EU laws] have been successfully finalized in way that have really attracted private capital to finance. You have to consider that the European Union needs international capital from the US and Asia. So they have to allow for a certain freedom of choice for international investors. Unfortunately we tend to be much too bureaucratic in what we offer so far. I hope that this is going to change in the future.”
In recent months, Germany has started a big push on sustainable finance with a government-led initiative developing a national sustainable finance strategy. Its panel of market experts includes Matthias Stapelfeldt, Head of Sustainability Management at Union Investment.
“It’s a surprising move and also a very good move,” says Schindler. “Because it’s the first time a group with regards to climate-related issues has been formed by the government. You have all stakeholders from NGOs to the industry. So everybody has a seat at the table.
Schindler says the initiative complements a German ministerial initiative working on among other things making Germany CO2 neutral by 2050. “There is quite a dynamic approach to it definitely initiated by outcome of the European elections.” (German Greens got over a fifth of the vote share at the 2019 European Parliament elections).
Union Investment is also signatory to the Frankfurt Declaration aimed at making the city a sustainable finance centre.
This year, Union Investment started to incentivize ESG into staff pay, with bonuses dependent on the quality and comment of company engagement entered into a central database for staff. It also plans to increase the number of analysts focused solely on ESG from 12 to 16.
Its ESG committee includes the CIO and heads of fixed income and equities. It recently introduced KPIs for climate change across its whole portfolio including the temperature contribution of climate change of each stock and their willingness to change (with regards to reducing carbon emissions).
Schindler says Union Investment plans to launch climate-related funds due to client demand. It launched its first green bond fund in 2017.
Union Investment, which is owned by German cooperative banks, has a goal in five years to integrate full ESG across its portfolio. With the ESG agenda rising quickly across the financial industry, RI asks how it will differentiate from other players.
“I think as a whole asset managers will have to prove they really have the skills, the capacity, the resources, and the ability to to integrate ESG. From my point of view it requires you to engage actively as an investor. In the case of companies like Vale, active managers cannot only engage, they can also divest as an ultimate action. That is where active managers can set themselves apart from passive managers.”
This interview was conducted before Union Investment released its first-half report today in which it said its sustainably managed funds increased from around €42bn to €48bn over the twelve-month period, with the institutional business accounting for €43.7bn of that total. “Sustainability is now an essential factor in the investment strategy of institutional investors,” said CEO Hans Joachim Reinke in the statement.