Deutsche ventures into ethical funds arena

Deutsche Bank has partnered with an ethical investment specialist to launch a series of investment products in anticipation of a surge in demand for socially responsible investments from European clients.

The German lender’s new products, which will be focused on companies with robust environmental, social and governance (ESG) policies, will track the returns of two indices of sustainable stocks created by Arabesque Partners.

Deutsche Bank’s push into the responsible investment market comes shortly after it was criticised as the world’s top financier of coal companies. In the past, the bank has also come under fire from campaign groups for pushing up food prices through its dealings in agricultural derivatives.

But alongside asset managers, Deutsche anticipates that demand for socially responsible investment products will grow and wants to capitalise on that trend.

“We have seen a strong increase in demand for ESG-based products over recent years,” said Sean Flanagan, head of equity structuring at Deutsche Bank. “The topic will keep growing in relevance.”

Deutsche Bank is aiming to raise €1 billion through the products in the next two years.

Assets

According to the Global Sustainable Investment Alliance, the value of assets invested with a sustainable mandate has grown 61 per cent to $21 trillion between 2012 and 2014. ESG-focused funds have more than doubled in assets to around $13 trillion of assets, according to the association.

The indices tracked by Deutsche’s products assess thousands of companies on metrics such as the rigour of their accounting practices, the independence of board directors, their carbon footprints and their environmental records.

Arabesque then applies another range of filters to identify which companies score highly on criteria such as financial stability and market sentiment.

According to Arabesque’s measures, Unilever, the consumer goods group, receives a high ESG score, while Valeant, the Canadian drugmaker, and Sun Edison, the solar energy company, fall short.

But analysts warned that ESG indices do not always reward the most responsible companies, or punish the worst offenders.

Muna Abu-Habsa, a researcher at Morningstar, the data provider, said: “Investors need to pay attention because their principles will not always be aligned to their managers’ approach to responsible investment.

“A manager might be happy enough to invest in supermarkets, but part of [a supermarket’s] revenues could come from an alcohol company that is not ESG and as an investor you don’t know.”

Research from Morgan Stanley, the US bank, recently indicated that younger investors are more interested in sustainable investing than previous generations.

But Jake Moeller, head of UK and Ireland research at Lipper, the research company, cast doubt over the growth potential of the responsible investment market. He said that only 3 per cent of the world’s assets under management go towards socially responsible investments, a level that has not changed over the past 15 years.

– Copyright The Financial Times Limited 2016