Impact

As the topic of impact is complex, the potential of both funds offered by Ethius Invest in this regard will be examined in more detail. This will be done using impact categories from the scientific publication “The Impact of Sustainable Investment Funds”, which was written by Professor Marco Wilkens from the University of Augsburg together with colleagues. It was selected because it relates specifically to investment funds and also addresses impact channels that are currently receiving less attention. 
 

Positive change in the real world

 

Do the Ethius Global Impact and CSR Bond Focus SDG actually bring about positive change in the real world? In view of the large financial requirements resulting from the UN Sustainable Development Goals under the 2030 Agenda alone, this is precisely the question that is increasingly coming into focus. When and how can sustainable investments contribute to sustainable development? What impact channels are there? When can an impact be legitimately assumed? And when not?

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Does the investor or the investee create an impact?

 

A key distinction that is fundamentally made in the impact debate is that between the impact of investments and the impact of companies. It is immediately clear that companies can have a positive impact on climate protection through the production of solar energy, for example. However, an investment can only claim this as an impact if the company was able to produce additional solar energy as a result of the investment. In the case of investment funds that only buy and sell shares on the secondary market, no effect is logically achieved.
 

In the aforementioned academic publication, Professor Wilkens distinguishes three categories of potential channels through which investment funds in particular can bring about change in companies:
 

• Engagement,

• Portfolio-Allocation and

• additional impact channels

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Impact channel engagement

 

Grundsätzlich können Investments über Engagement bei Unternehmen direkt Veränderungen bewirken. Hierbei wird meist zwischen dem Abstimmungsverhalten auf Hauptversammlungen, dem so genannten Voting, und der Einflussnahme auf Unternehmen über Dialoge, dem sogenannten Engagement, unterschieden. Die Möglichkeiten sind vielfältig und können Briefe, Kampagnen, gemeinschaftliches Engagement, eigene Aktionärsanträge oder möglicherweise sogar juristische Prozesse umfassen.

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Voting and engagement strategies at the Ethius Global Impact mutual fund

The Ethius Global Impact mutual fund focuses on this impact channel. The starting point is publicly available and internal profiles of the fund companies' strengths and weaknesses. In addition, the companies are continuously and very closely monitored with regard to controversies and business practices. On this basis, suggestions or demands on relevant topics and current controversies can be derived. Ethius Invest enters into dialog with the companies on a case-by-case basis via telephone and investor conferences, during on-site visits or by letter.

Ethius Invest makes particularly active use of the opportunities arising from shareholder rights. For example, team members regularly attend Annual General Meetings to exercise their voting rights, use their right to speak and ask questions or submit their own shareholder proposals and counterproposals. Ethius Invest discloses information on the exercise of voting rights in annual voting reports. Being able to attend all Annual General Meetings is in itself a unique selling point. This is because, in the case of funds, shareholder rights are usually legally held by the associated capital management companies (KVGs). However, Ethius Invest can secure access via the company's own securities portfolio, which contains all the companies in its own fund. This additional channel is unique in the landscape of German private label funds.
 

As an active member of the pan-European association Shareholdes for Change (SfC) and an honorary member of the board of this institutional investor network, Ethius Invest also makes use of the opportunities for joint engagement. This is significant as several studies indicate that the likelihood of success of engagement is related to the size and therefore potentially the number of investors leading the dialog.
 

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Impact channel portfolio-allocation

In principle, sustainable investments contribute, at least in theory, to a more sustainable allocation of capital. On the one hand, they channel capital into sustainable economic activities, which can be realized and grow as a result, and on the other hand, they withdraw capital from non-sustainable economic activities, which can no longer be realized and shrink as a result. However, there is a catch to this logic. Assuming perfect markets, companies will almost always be able to raise capital for profitable, non-sustainable but legally permitted economic activities from alternative sources. Sustainable investments therefore make no difference here, at least at the level of individual products.

​Portfolio allocation through sustainable investments can, if at all, only have an indirect effect. This would be the case, for example, if positive selection criteria had an impact on share prices and the cost of capital of companies, which would lead to lower capital costs for sustainable companies and thus support their growth. The total market share of sustainable investments is decisive for the extent of this indirect effect mechanism.
 

The CSR Bond Focus SDG mutual fund strengthens sustainable business models

 

However, there are cases where sustainable investments can still contribute directly to enabling the growth of sustainable business models. In their Investor's Guide to Impact, scientists Florian Heeb and Julian Kölbel name the impact channels that open up new/undersupplied capital markets and provide flexible capital. In other words, the aim is to invest in companies that, due to restrictions, are unable to access alternative sources of financing at any time, either at will or with the necessary flexibility.
 

This is where the CSR Bond Focus SDG comes into play. Around 40% of the fund is currently invested in small issuers without a current credit rating. A lack of a credit rating can be a serious obstacle to accessing financing. By investing in these companies, the CSR Bond Focus SDG therefore helps to open up potentially underfinanced markets. As the CSR Bond Focus SDG is based on a demanding selection process based on sustainability criteria, it also contributes to the growth of sustainable companies and business models.

 

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Additional impact channels

 

When comparing the impact channels, engagement is often considered to have the greatest potential. Some studies point in this direction. Professor Wilkens, on the other hand, believes that the other channels have the greatest impact. He considers the generation of information, the influence of sustainability on the reputation of companies and awareness-raising to be among the most important.

First of all, it is immediately plausible that sustainable investments lead to more sustainability-related information. In this context, regulations such as the guidelines on sustainability reporting by companies or the EU Disclosure Regulation for financial market players should also be mentioned. However, individual financial products also generate sustainability-related information. In the case of the Ethius Global Impact fund. for example, this includes publicly accessible company profiles, reports on voting behavior at annual general meetings and regular engagement reports such as the company's own annual impact report (available on request) or the annual engagement report of the investor network Shareholders for Change. 

Sustainability-related information can have a direct impact on a company's reputation, which can influence product sales, attractiveness for potential employees or the social acceptance of entire business models. This also applies to information disclosed at annual general meetings. From a reputational perspective, it can also be important for companies to be included in certain sustainability indices such as the Global Challenges Index or sustainability funds or to remain in them.

The reputation of investors can also be relevant with regard to questions of impact. There are indications in the literature that, in addition to capital power, the reputation of the investor leading the dialog also favors the likelihood of successful engagement.
 

Publicly available sustainability-related information, for example from investment funds, can also help to raise awareness of social and environmental challenges and possible solutions. This in turn can contribute to more sustainable individual behavior and strengthen political commitment to sustainability.
 

Mutual funds with a donation component

 

Another channel that has so far received little attention in the impact discourse is the donation of parts of the management fees of funds. In a narrower sense, this may not correspond to the above-mentioned impact due to an investment, but at least to an impact due to an investment construct. After all, fees are a component of all investment funds. If such a donation component is part of the fund concept, it has a direct additional impact.
 

This is the case with Ethius Global Impact. On an ongoing basis, 15 percent of the management fee flows into projects selected by an independent foundation advisory board for the following six areas defined by Ethius Invest: Drinking water, population development, deforestation, climate change, poverty, biodiversity. The donations and implemented projects are disclosed on the Ethius Invest foundation website. CSR Beratungsgesellschaft, in its role as portfolio manager of both funds, distributes one third of the company's profits to its charitable shareholder, the Clément Foundation.

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Two mutual funds – fourfold effect

 

In summary, it can be said that the Ethius Global Impact fund firstly develops direct impact potential through its involvement - particularly in the area of general meetings and together with other investors in the Shareholders for Change network. Secondly, it achieves an additional direct impact with its donation component. The CSR Bond Focus SDG fund works via a third channel by providing capital to sustainable business models that tend to be underfunded.
 

Fourthly, both funds have an impact via other channels such as reputation, awareness-raising and the publication of sustainability-related information. Even if these channels are difficult to grasp, their impact may be greater than initially assumed. In addition, both funds, together with the many thousands of other sustainability funds worldwide, contribute to further increasing the proportion of sustainable investments, which can influence financing costs. The quantitative contribution of both the Ethius Global Impact and the CSR Bond Focus SDG funds to this is marginal in the big picture, but at the same time undoubtedly greater than zero.