Investing sustainably demands a lot from equity fund managers: They not only have to assess the price potential of a share, but also the sustainability of a company.

Grades and points awarded by external agencies, so-called ESG scores and ratings, are intended to support them in this.

This has always worked very well for large companies in Europe, says Jan Rabe, who is responsible for ESG integration at the Metzler Bank's Sustainable Asset Management department.

In this way, stable excess returns could be achieved compared to the market average.

Martin Hock

Editor in business.

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This is different for small caps. According to an in-house study, the use of ESG scores and ratings has not been able to increase the yield significantly for a number of years. "Secondary values ​​are given a penalty with regard to the ESG scores and are often rated as weaker than standard values," says Rabe. "If this is then included in investment decisions, small caps are at a disadvantage." This was still different during the financial and euro debt crisis, when ratings played a role in the "flight to quality". Since then, however, they have tended to be irrelevant for investment decisions. “The fundamental problem is that smaller companies often cannot fall back on the same resources to present their sustainability reporting in as much detail as large companies.But that doesn't mean that small caps are less sustainable. "

ESG criteria can also be used for small caps to increase portfolio returns. Just not schematically according to grades and points. According to Metzler, there are two main factors that promise success. In principle, companies should be avoided that are conspicuous due to controversy. Small caps generally performed better here. Owner-managed companies in particular pay more attention to their reputation than large corporations, and they are less the focus of attention. The less complex value chains are also less prone to controversy. “It is plausible that avoiding controversies can lead to better investment success. Not infrequently, such controversies also point to problems in the business model. "

Instead of controversial stocks, it is advisable to invest in companies that add value for the environment and society. In the past, ecological added value was a plus. Taking into account the entire value chain, the warming potential of a corresponding portfolio of secondary stocks was, at 2.7 degrees, significantly lower than the market average of 3.3 degrees.

“For the future, one shouldn't disregard the social added value of an impact assessment.

Even if this is difficult to predict, this could be more important in the future, ”says Rabe.

On the other hand, it could become more difficult with a view to the ecological added value.

“A rethink has begun when it comes to ecological added value.

Simply relying on renewable energies and e-mobility might fall short.

A holistic view takes into account that a wind turbine, because it consists largely of steel and concrete, can ultimately only be completely green if it is steel and cement.

That is why investments will have to be made in these industries as well. "