Everybody is talking about sustainability – also with regard to financial products. The providers of sustainable investments refer to them as ecological, social, ethical, green, climate-friendly and responsible products.

In mid-May, BaFin held a conference at the Umweltforum in Berlin to discuss sustainable finance with academics and financial supervisors as well as decision-makers from companies and associations (see expert article on the BaFin website dated 26 June 2019). In addition to this, BaFin commissioned an online survey focusing on the attitudes of consumers towards sustainable investments.

In December last year, market researchers asked a representative sample of 1,000 individuals about sustainable investments. The aim of the survey was to gain relevant information for consumer protection and to find out what the respondents know about sustainable investments (see “Sustainable investments” info box), how safe these investments are, and what their preferences are as far as environmental, social and ethical aspects are concerned.

Around 60% of those surveyed were not familiar at all with the term “sustainable investments”. On the other hand, 38% of the respondents had at least heard of the term. The remaining 2% said they did not know whether they had heard of it.

How “green” are time deposits considered to be?

The survey also examined whether the respondents believe that this term is only used within an environmental context or whether they also associate it with social or ethical aspects. To find this out, the respondents were asked to say whether they agree or disagree with certain statements, ranging from general claims to very specific examples (see Chart 1). For instance, a time deposit at a bank that is not involved in food speculation is considered a sustainable investment according to 29% of the respondents. However, 43% do not share this view. Even fewer respondents agreed with the following statements: 22% said that shares in an organic clothing manufacturer are a sustainable investment, regardless of whether children are involved in the production of cotton. And 19% believe that investing in nuclear power is a sustainable means to tackle climate change.

Only 27% of the respondents take the view that sustainable investments only serve the purpose of protecting the environment, while 49% explicitly disagreed with this. 7 out of 10 people consider that, in the context of sustainable investments, investors target companies that adhere to certain standards relating to environmental aspects, production conditions and value-based management.

With its 2030 Agenda for Sustainable Development, the United Nations is aiming to achieve global economic development while promoting social justice and protecting the natural resources of the planet. In the survey, approximately two thirds of the respondents agreed that sustainable investments serve this purpose.

Chart 1: What counts as a sustainable investement?

Protecting the climate is viewed as the most important sustainability aspect

When the respondents were asked what they consider to be the most important aspects of sustainable investments (see Chart 2), the most frequent responses were protecting the climate (52%), human rights (48%) and environmental protection (47%). Around 4 out of 10 of the respondents believe that tackling poverty and hunger and promoting renewable energies is particularly important. This shows that a range of broad environmental and social issues are considered a top priority. Excluding corrupt companies and governments, which is vital in ensuring good corporate governance, came in 8th position.

Chart 2: Key factors in the context of sustainable investments (multiple answers possible)

The survey also focused on the respondents’ personal preferences and their willingness to invest. Two thirds of the respondents said that investing while doing something good makes them feel good (see Chart 3). 3 out of 5 respondents said they would like to help protect the climate and the environment with their investments, while 54% said that sustainable investments match their personal values and goals. By contrast, only 1 in 6 consider sustainability to be unimportant.

Overall, there is a great willingness to invest in sustainable investments. 62% of all the respondents said they could see themselves making such an investment in principle. This was true for as much as 87% of the 398 people surveyed who intend to invest EUR 1,000 or more within the next 6 months.

It is also interesting to see what happens when government incentives come into play: among the 25% who said they could not see themselves investing in a sustainable investment, 39% said they would be willing to do so if there were government incentives in place, such as subsidies or tax advantages.

Chart 3: Attitudes towards sustainable investments

Economic vs ecological preferences

For over 75% of the respondents, economic aspects are major factors when making an investment decision. This includes low risk (37%), liquidity (23%) and high returns (17%). But for around a quarter of the respondents, environmental (9%), social (7%) or ethical aspects (7%) are the top priority.

With investments, the relationship between return and risk is a perennial factor. According to this consumer survey, 38% are willing to accept a lower return on sustainable investments (see Chart 4). More than 1 in 6 respondents are even willing to take a greater risk. Of course, some of the respondents had the opposite view and explicitly said they would not be willing to do this. A quarter of the respondents said that a lower return would not be an option for them, while half of them said they would not want to take a higher risk with sustainable investments. According to 41% of those surveyed, sustainable investments secure a better return in the long run.

Sustainability: a multi-faceted term

Half of the respondents associate sustainable investments with safe investments because they believe that investors target future-oriented businesses in this context. Only 26% of the respondents disagree with this.

It should be noted that sustainability can be a multi-faceted term covering different concepts. In the field of environmental policy, sustainability refers to environmentally sustainable economic activities. But for many economists, sustainability refers to a company’s ability to maintain long-term economic success; a business model that bears fruit in the long run.

In the context of sustainable business, the environment and, in some cases, social aspects have been taken into account for some time now. From a long-term perspective, this can contribute to a company’s economic success. Consumers, however, should be aware that sustainable investments are not safe by definition.

Respondents underestimate certain risks

The survey also focused on whether retail investors are able to accurately assess the risk that sustainable investments entail. To find this out, the respondents were asked, for example, to say how risky a “green” equity fund or a direct forestry investment is in their view (see Chart 5).

The results provided insightful information. Depending on the type of investment, between a quarter and a third of those surveyed were not aware of the risks involved. 19% of the respondents appeared to be influenced by the fixed interest rates that hydro bonds have to offer, as they were considered to be a safe investment according to this group. Another 26% said they believe that relatively small losses may be incurred with such investments. It is also worth noting that the risk of these investments was considered virtually equivalent to that of a “green” passbook savings account.

Information is key

While 10% of those surveyed consider that a total loss is possible in the case of fixed-rate hydro bonds, around 16% said that this was possible in the case of direct forestry investments. 18% said this was true in the case of closed-end solar funds. This minority of respondents were right and correctly determined the risks associated with these investments: a total loss is possible (see “Good to know” info box).

The online survey also covered the information that is made available, choice on the market and the advice provided. 53% of the respondents claimed that there isn’t enough information about sustainable investments. 43% consider that there is a lack of choice as far as sustainable investments are concerned. 39% of those surveyed said that they would make their personal data available on the internet in order to obtain an investment comparison free of charge from an independent information portal. 53% were more cautious and reticent to provide such information, saying they would rather not do this. 32% of the respondents currently have a financial advisor. In addition, the survey showed that 62% of the respondents would like their financial advisor to actively ask them during an investment consultation whether they wish to have sustainability criteria taken into account in their investments.

Chart 4: Return and risk

Chart 5: Assessing the risk of sustainable investments

In any case, investment firm customers will be asked about their sustainability preferences in the near future, allowing the customer’s preferences to be considered when selecting products and determining the suitability of an investment. This is set out in the European Commission’s action plan on financing sustainable growth of March 2018. The action plan includes a unified EU classification system for sustainable activities – or taxonomy (see “Taxonomy” info box) – which is intended to provide clarity on which activities can be considered sustainable.

Conclusion

Although many people have not yet heard of sustainable investments, there is a strong interest in them. Many people associate sustainability not only with the protection of the environment and the climate but also with social or ethical aspects. But for the majority, economic aspects are key factors when making an investment decision. There is a widespread view that sustainable investments are safe investments. In particular, many are not aware of the risk of direct investments. BaFin advises consumers to seek detailed information on what they are investing in and who they are entrusting their money to before deciding to make an investment.