Update Magazin II/2019 Download the complete magazine

Mr. Utermann, you are a member of the Board of the International Capital Markets Association (ICMA), which has established the Green Bond Principles and Social Bond Principles. What do you consider to be the greatest accomplishment of these rules?

Andreas Utermann: This is for sure that an entity from the non-public sector established guidelines that have been adopted as the international standard. Politicians can be all too ready to believe that such things are impossible.
The private sector does not have a solution for every problem. That’s why there is always room for public regulation. But regulation by public officials simply cannot be the only solution.

A sort of private role model?

Andreas Utermann: Absolutely. The way these principles developed and ultimately became established in the market is a very good example of how the private sector can create guidelines that work and are accepted by everyone. It’s a principles-based approach rather than a regulation-based approach. Both approaches have their merits, but no single approach can provide a comprehensive solution.

What challenges do you think the market for Green, Sustainable or Social Bonds will face over the next five years?

Andreas Utermann: I see two challenges. The first will be preventing a major scandal involving green-washing that would completely undermine trust in this market. Issuers and market players have a big responsibility to make sure such a scandal does not occur. The second challenge is more practical in nature. There are not enough green investment projects for the very high level of demand. Overall, this has two consequences. First, this high level of demand for investment projects means there will be a temptation to become creative. As a result, we need to take care of the supply side. Second, this high demand may depress expected bond yields to levels that will no longer provide adequate compensation for the risk assumed.

The action plan for green and sustainable finance is being developed at EU level. What do you consider to be the salient aspects of the EU’s action plan?

Andreas Utermann: One of the most important points in this is the new unified classification system (“taxonomy”) that is being designed to create a shared understanding of what ‘sus-tainable’ means, and which economic activities can be considered environmentally sustainable. Indeed, in recent years, people have often expressed confusion about what green and sustainable investing is, which is why this “taxonomy” is important. I hope that the taxonomy will provide greater clarity about this market.

If you had two wishes for the action plan, what would these be?

Andreas Utermann: It is important to ensure that no rules are created about how investors should invest their money, and how investment professionals should do their jobs, i. e. invest in certain benchmarks. Then, the global perspective. Asset managers based in Europe have a global customer base. Global investors such as pension funds have totally different fiduciary obligations from European ones. Careful attention must be paid that European lawmakers do not restrict the ability of the European asset management industry to do the best job it can for a broad spectrum of investors.

Can the EU create a standard that will become the international blueprint?

Andreas Utermann: For legal, cultural and political reasons, Asian and U.S. Investors do not have such deeply embedded “green” views. But they are aware that a lot must be done about climate and sustainability issues. This also includes implementing diverse sustainability-oriented investment approaches: integrated ESG, exclusion approaches, SRI, impact investing, green bonds etc. All these approaches have merit and are equally suitable for tackling humanity’s current problems and objectives relating to the environment, climate and sustainability. We now have the opportunity to influence the global agenda.

How likely is a case of greenwashing that will cause a stir, unsettling the markets and causing permanent damage?

Andreas Utermann: I think the risk of that happening is relatively low. Issuers, investors and units that design products for end-customers have a lot of responsibility. The fact that the aforementioned institutions are well aware of this is a strong hedge against such cases of greenwashing. But beyond this aspect of moral conduct, the reality is that this segment still has certain grey areas.

What specifically do you have in mind?

Andreas Utermann: It's conceivable to me that a pool of investments might also contain some whose CO2 emissions are questionable. Take a company that is in the process of transitioning to lower CO2 emissions. So, it’s quite possible that investment managers increase their stake in this company because they want to help steer it onto the right path, and as a result they may occasionally have an investment that is not wholly green. But I cannot see this turning into a systemic scandal. There’s too much monitoring and transparency in this market.

Green and sustainable investments are still largely confined to the institutional world. When do you expect broad-scale offerings for all kinds of investors?

Andreas Utermann: In the case of green bonds, there are already open-ended funds for all investors. But the volume is still low in this asset class, so I consider it a very good sign that there is talk in Germany about issuing green German government bonds (“green Bunds”). A broader look at the extent to which ESG is integrated across all asset classes clearly indicates where we are heading. The portion of ESG-compliant assets is still small, currently accounting for around a quarter. However, I am convinced that in say five years, almost our entire portfolio of assets under management will be ESG compliant. The EU taxonomy will help customers to recognise false labelling.

How important are the concepts “green and sustainable” to asset management at your company?

Andreas Utermann: We have 100 portfolio managers and researchers who focus exclusively on ESG, and the trend is increasing. They take the MSCI Sustainability Rating as the starting point for their work, but can adjust the rating up or down based on their own research. For specific SRI research, we rely on several providers, depending on the issue, sometimes in consultation with the customer. But here, too, the manager will make the final decision. Since 2000, we have had our own in-house ESG research unit that has helped us to play a pioneering role.

Do you identify your customers’ preferences regarding ESG , and then translate these into bespoke portfolios?

Andreas Utermann: Currently, we are seeing the strongest growth in impact investing, with a clear focus on renewable energies and related topics, like energy storage. But in this area the range is limited and it’s hard to diversify. I think that the EU standards will result in greater diversification, because through targeted investments, any company from any industry can improve its environmental footprint. Consider buildings, which account for 40% of energy consumption and 35% of CO2 emissions in Europe. I can imagine a big company issuing a green bond in order to upgrade its buildings to carbon-neutral status. Our building on Bockenheimer Landstrasse in Frankfurt saved almost 800 tons of CO2 in 2018 compared to the year before. There is huge potential.

What is the volume of assets under management (AuM) that you are already managing today in accordance with ESG criteria, and what percentage of total AuM does that represent?

Andreas Utermann: In total, we manage EUR 146 billion in the categories of ESG Integrated, SRI and Impact Investing. These account for 27% of our total assets. We believe this figure will continue to grow month by month, as we are gradually shifting additional strategies to the ESG approach.

What do you estimate the percentage of ESG-compliant AuM will be in three to five years?

Andreas Utermann: We posed that same question to 500 institutional clients worldwide. Of these, 37% intend to manage their entire portfolio in accordance with ESG criteria by 2025, while 71% plan to do so by 2030. In Germany the figures are even higher, at 53% and 83%. I’m convinced that by 2025 there will be virtually no asset managers without ESG strategies, and that by that time many will have more ESG-compliant assets under management than conventional AuM. I will be so bold as to say that I expect the figure to be as high as 70% in Germany.

I am convinced that in say five years, almost our entire portfolio of assets under management will be ESG compliant.

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