The rather lacklustre progress of SRI in Germany’s institutional investment market was given a boost in July when the Bundesrat, the country’s upper house, passed legislation extending the SRI reporting obligation for Pensionfonds to the much more numerous and asset-rich Pensionskassen.
The reporting obligation that requires funds to disclose whether they invest in SRI and if so in what form has been piloted with pension funds since their introduction in 2001; earlier this year the Berlin-based SRI Forum carried out a study to evaluate the pilot study. It found that of total Pensionsfonds assets of E75m around 5% is invested on SRI principles. Of the 25 Pensionfonds there are now eight which invest part of their equities portfolio - up to 30% in some cases - in SRI.
“On the basis of this success we have decided to lobby for its introduction in other pension funds too,” says Walter Kahlenborn, chairman of the SRI Forum, an association of banks and asset managers, insurance companies, research companies, and pension funds covering German-speaking Europe. “It is only through getting the big players that we will make a full success of this project.”
SRI faces considerable challenges in the German institutional market. When the German SRI market first came into being at the beginning of the 1990s funds started investing in companies supplying environmental technology. But this was just at the moment when the market moved from add-on technologies - which funds were investing in - to production technologies which integrated environmental protection into the production process. “As a result the environmental protection technology funds lost a lot of value and so already at the outset SRI gained the reputation that it doesn’t pay,” says Kahlenborn.
He adds: “Another reason is that while asset managers in markets such as the UK are independent of the big banks, in Germany it is all one area. So the way in which asset managers behave is dependent on the business policy of the banks themselves. They have always been very reluctant to invest in SRI because of the risk that business from clients in excluded areas will fall away. For the same reason the concept of engagement is non-existent here. Banks don’t want to offend their clients. But this is changing slowly due to the spread of the Anglo Saxon investment mentality. So asset management companies becoming more critical of the companies in which they invest.”
The slow progress can also be linked to understanding of fundamental investment concepts – that of long-term investing and the role played in that by SRI, for example. “It is very difficult to teach this idea to pension funds.”
How can we increase the amounts invested by institutions in SRI? When considering this question we must bear in mind that, unlike in the UK and other markets, German funds are very heavily invested in bonds; only 10% to 20% of portfolios are invested in stocks. “So if we are talking about 5% of the total portfolio in SRI then we are talking about up to half of the fund’s total allocation to equities,” says Kahlenborn. “So I don’t think pension funds’ SRI investments will get to very significant levels in next two to three years.”
And are institutions interested in learning about this area? “No,” says Kahlenborn. “I am very sceptical as to whether there would be interest in such training.”
However, one positive trend which may boost the institutional SRI cause in Germany is the exchange of experiences among institutional investors. “Life insurance companies and the pension funds are realising that SRI is perfectly normal in other countries and the reporting is very unproblematic,” says Kahlenborn.
He adds: “Funds here can learn a lot from what is happening in markets such as the UK or the Netherlands, and in Austria where much is going on in the market at present and where the move to more institutional SRI is proceeding very smoothly. I believe information from abroad is very important and would be particularly useful in case of the asset managers.”
There is no obligation to disclose the amount invested. “We look to Australia where the authorities are now introducing laws to show how reporting should be done not just that it should be reported,” says Kahlenborn. “But for now we have had a huge success and we should be very pleased with that.”
In spite of the difficulties and
challenges facing SRI in Germany’s institutional market Kahlenborn is upbeat about prospects. “With
the reporting obligation extended to the Pensionskassen we can
start thinking of much greater amounts under management.
I would hope that in five years SRI will account for 5% of the whole E100bn of institutional assets. I
am optimistic.”

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