Unlike regular investments, sustainable investments dispersed across the market did not yield any worse results, even during the recent financial crisis from 2007 to 2009. This is the finding of a study carried out by the Centre for European Economic Research (ZEW) on behalf of the German Federal Environmental Foundation (DBU).
“There is no longer any excuse to ignore the question of sustainability when it comes to investment. In particular, sustainable investment allows non-profit organisations to allow their charitable aims to influence their investment decisions without this leading to reduced returns,” explained DBU financial director Michael Dittrich during the presentation of the study today in Ostritz. “The more investments that are made according to sustainable values, the better the results by comparison,” says Dr. Michael Schröder, head of the ZEW Research Department “International Finance and Financial Management” and author of the study.
The Nature Share Index has significantly lower losses
Over the observation period for the study, several market-wide sustainability indices such as the Dow Jones Sustainability Index achieved almost the same results as the conventional benchmark index MSCI World. “It would, however, be wrong to believe that these broad sustainability indices can help us to escape the downward trend of the current crisis,” explained Schröder. Intensive selection based on sustainability would, however, bring certain benefits. For example, the Nature Share Index (NAI) faced significantly lower losses during the crisis and exhibited a significant outperformance (stronger share price development than the general market). The ZEW study thus confirms the findings of an earlier study also conducted on behalf of the BDU back in 2008 entitled “Sustainable Investments for Foundations”. This study also showed that the NAI produced significantly better results over a much longer time period than the benchmark indices. “Even during the capital market crisis over the last three years, the NAI’s performance advantage has improved considerably,” Schröder asserts.
Shares for maintaining endowment capital still important
The study also found that, even after both of the severe capital market crises in the past decade with the bursting of the dotcom bubble and the current debt crisis, shares are still an essential component of any long-term investment. Schröder: “This is particularly relevant for foundations, with the study even recommending a proportion of shares as high as 20 to 30 per cent if they are aiming for a real, inflation-adjusted preservation of capital.” Despite the costs, however, stock portfolios should be secured in order to protect the endowment funds from losses. It is almost impossible, particularly over a longer period of time, to ensure the real preservation of capital through bonds along with the dividends from the reserves permitted for non-profit institutions, which amounts to one third of ordinary income.
A broad portfolio of financial products the best strategy in times of crisis
“Currently, the best strategy for these uncertain times on the financial markets is probably to maintain a broad portfolio of bonds, shares, raw materials and real estate in different regions and maturing at different times,” explained Dittrich. This is also the current strategy of the DBU with its endowment fund of over 1.8 billion euros. The results of the study “Sustainable Investment in the Financial Crisis” were presented as part of the DBU’s 16th International Summer Academy in Ostritz/St. Marienthal. The focus of this year’s academy was on “Sustainable Investment – New Opportunities after the Financial Crisis?”
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