Sustainable investments are investments that not only generate a return, but also take into account environmental, social and ethical aspects. These investments should have a positive impact on the environment and society. Examples include investments in renewable energies, sustainable agriculture or social projects.

Topics

I. What are sustainable investments?

II. importance of ESG criteria

III. Sustainable investments compared to conventional forms of investment

IV. Sustainable investments and investment law

V. The responsibility of fund managers for sustainable investments

VI Liability for sustainable investments

VII. legal foundations and regulations

VIII. The market for sustainable investments

IX. Risks and opportunities of sustainable investments

X. How does a lawyer help investors with sustainable investments?

What are sustainable investments?

Sustainable investments, also known as green or ethical investments, are forms of investment that take into account social and environmental aspects in addition to financial considerations. This type of investment advocates sustainable development and the protection of our environment.

  1. Definition of sustainable investments
  2. Financial considerations and social and ecological aspects
  3. Promotion of sustainable development
  4. Protection of our environment

Unlike conventional investments, which are based solely on financial criteria, sustainable investments also take ethical and environmental aspects into account when selecting their investment products. This may include, for example, avoiding investments in companies that cause pollution or violate human rights.

Sustainable investments are a way to invest your money in a way that not only benefits you financially, but also makes a positive contribution to our society and our environment.

Importance of ESG criteria

Compliance with ESG (Environment, Social, Governance) criteria is becoming increasingly important when selecting sustainable investments. ESG criteria refer to environmental, social and ethical aspects as well as corporate governance.

Investors and fund managers must ensure that these criteria are taken into account when selecting investments. ESG criteria are designed to ensure that investments not only generate a good return, but are also socially and environmentally responsible.

Below are some examples of ESG criteria:

  • Environment: it is about reducing the environmental footprint of companies and investments. Examples of ESG criteria that relate to the environment are, for example, the abandonment of fossil fuels, the reduction of CO2 emissions or the use of renewable energies.
  • Social: It is about investments having a positive impact on society. Examples of ESG criteria that relate to social responsibility are, for example, the observance of human rights, the avoidance of discrimination or the promotion of social projects.
  • Governance: It is about companies being managed transparently and responsibly. Examples of ESG criteria that relate to corporate governance are, for example, the independence of the supervisory board, the transparency of business practices or the avoidance of corruption.
  • In Germany, there are various laws and regulations that deal with ESG criteria and sustainable investments. Some of them are:
  • Climate Protection Act: The Climate Protection Act obliges companies and fund managers to align their investments with climate protection goals.
  • Environmental Information Act: The Environmental Information Act regulates access to information about the environment that may be relevant to investment decisions.
  • Sustainable Finance Disclosure Regulation (SFDR): The SFDR is an EU regulation that requires fund managers and investment advisors to consider ESG criteria in their investments.
  • German Sustainability Code: The German Sustainability Code is a voluntary code that provides guidance to companies and fund managers on how to comply with ESG criteria.

It is important to emphasise that taking ESG criteria into account is not only important for ethical reasons, but can also offer long-term economic benefits. For example, companies and investments that comply with ESG criteria can be more stable and sustainable.

Sustainable investments compared to conventional forms of investment

Sustainable investments differ from conventional forms of investment in their focus on ecological, social and ethical aspects. While conventional forms of investment are often only geared towards achieving a high return, sustainable investments are also intended to make a positive contribution to society and the environment. Some differences between sustainable investments and conventional forms of investment are listed below:

  • Orientation: Sustainable investments have an orientation towards ecological, social and ethical aspects. Conventional forms of investment, on the other hand, usually only aim to achieve a high return.
  • Investment objects: Sustainable investments invest in companies, projects and initiatives that have a positive impact on society and the environment. Conventional forms of investment often invest in companies that merely promise a high return, regardless of their impact on society and the environment.
  • Risk diversification: Sustainable investments often offer better risk diversification than conventional forms of investment because they invest in a variety of investment objects.
  • Return: There is often a discussion about whether sustainable investments achieve a lower return than conventional forms of investment. However, there are also studies that prove the opposite. One example is a study by Morgan Stanley, which found that sustainable investments achieved a similar return to conventional investments from 2004 to 2014.

Another important factor when considering sustainable investments in comparison to conventional forms of investment is that sustainability and profitability are not antithetical. On the contrary, sustainable investment strategies can also offer financial advantages, for example by reducing the risk of investments or promoting innovative companies.

In this context, there is a fitting quote from Paul Polman, the former CEO of Unilever, who said: “Sustainability is the best business plan”. This means that companies that are committed to sustainability can be more successful in the long run than companies that focus solely on returns.

In summary, sustainable investments are an alternative to traditional forms of investment and offer a way to make a positive contribution to society and the environment without sacrificing a reasonable return. It is important to emphasise that sustainable investment strategies do not automatically mean lower returns and that sustainability and economic efficiency are compatible.

Sustainable investments and investment law

Compliance with investment law also plays an important role in sustainable investments. Investors and fund managers must ensure that their investments comply with legal requirements and that they are also sustainable in the long term. Below are some aspects of investment law that should be taken into account in sustainable investments:

  1. Investment advice: Investment advisors must offer their clients detailed and comprehensible advice that also addresses the special features of sustainable investments.
  2. Prospectus requirement: Fund managers must provide their clients with a detailed prospectus containing all relevant information on the investments.
  3. Diversification: Fund managers must ensure that they diversify their portfolio broadly in order to reduce the risk of losses.
  4. Investment guidelines: Fund managers must establish clear investment guidelines that include compliance with ESG criteria.
  5. In Germany, there are various laws and regulations that deal with sustainable investments and investment law. Some of them are:
  6. Investment Act (InvG): The Investment Act regulates the requirements for investment funds and sets requirements for investment management.
  7. Securities Trading Act (WpHG): The Securities Trading Act contains regulations on investor education and the prevention of insider trading.
  8. Investment Act (VermAnlG): The Investment Act regulates the issuance of investments and sets requirements for the preparation and review of prospectuses.
  9. German Corporate Governance Code: The German Corporate Governance Code provides recommendations on responsible corporate governance and regulates the cooperation between companies and investors.

It is important to emphasise that sustainable investments do not automatically offer better legal protection than conventional forms of investment. Investors and fund managers must ensure that their investments comply with legal requirements and that they are also sustainable in the long term.

It is therefore advisable to carefully inform oneself about the legal aspects before investing in sustainable investments and, if necessary, to seek legal advice.

The responsibility of fund managers in such investments

Fund managers have a special responsibility when selecting sustainable investments. They must ensure that their investments meet ESG criteria and that they are sustainable in the long term. Below are some aspects of fund managers’ responsibilities:

  1. Compliance with ESG criteria: Fund managers must ensure that their investments comply with ESG criteria and that they make a positive contribution to society and the environment.
  2. Long-termism: Fund managers must ensure that their investments are sustainable over the long term and that they are not only seeking short-term gains.
  3. Transparency: Fund managers must report transparently on their investments and their impact on society and the environment.
  4. Risk management: Fund managers must ensure that they manage the risk of their investments appropriately and that they diversify their investments broadly.

There are also laws and regulations that deal with the accountability of fund managers in sustainable investments.

One example is the EU Disclosure Regulation, which requires fund managers to report on the alignment of their investments with ESG criteria. The German Investment Act (InvG) also regulates the responsibility of fund managers when selecting investment objects.

George Serafeim, Professor of Sustainability at Harvard Business School, said in this regard: “Sustainability is no longer a luxury – it’s a matter of survival.”

This shows that the responsibility of fund managers in sustainable investments has not only an ethical but also an economic meaning. If fund managers take their responsibility seriously and invest in sustainable investments, they can not only have a positive impact on society and the environment, but also achieve sustainable returns in the long term.

Liability in sustainable investments

Liability issues can also arise with sustainable money investments, especially if the investments do not meet ESG criteria or if they are not sustainable in the long term. Some aspects of liability in sustainable investments are listed below:

  • Prospectus liability: If a fund manager prepares a prospectus that contains incorrect or incomplete information, it can be held liable for damages.
  • Contractual liability: If a fund manager breaches the contractual agreements with an investor, he can also be held liable for damages.
  • Liability for wrong decisions: If a fund manager makes a wrong investment decision that leads to losses, he can also be held liable for damages.

There are also laws and regulations that deal with liability in sustainable investments. One example is the German Investment Code (Kapitalanlagegesetzbuch, KAGB), which regulates the liability of fund managers when selecting investment objects. The German Civil Code (BGB) also contains regulations on the liability of contracting parties.

It is important to emphasise that liability for sustainable investments is not automatically higher than for conventional forms of investment. However, investors and fund managers must ensure that they carefully consider their investments and that they comply with ESG criteria.

In case of uncertainty or questions about liability issues in sustainable investments, it is advisable to consult an experienced lawyer.

In summary, liability issues play an important role in sustainable investments and investors and fund managers need to carefully consider whether their investments meet ESG criteria and are sustainable in the long term in order to avoid potential liability risks.

Legal foundations and regulations

In Germany, there are various legal foundations and regulations that deal with sustainable investments. These are important to ensure that investments comply with legal requirements and that they are also sustainable in the long term. Some relevant laws and regulations are listed below:

  1. EU Disclosure Regulation: The EU Disclosure Regulation requires fund managers and financial advisors to report on the alignment of their investments with ESG criteria. This regulation also applies to companies with more than 500 employees.
  2. Investment Act (InvG): The Investment Act regulates the requirements for investment funds and sets requirements for investment management. It also contains regulations on the avoidance of conflicts of interest.
  3. Securities Trading Act (WpHG): The Securities Trading Act contains regulations on investor education and the prevention of insider trading. It also regulates the licensing of financial service providers.
  4. Investment Act (VermAnlG): The Investment Act regulates the issuance of investments and sets requirements for the preparation and review of prospectuses.
  5. German Corporate Governance Code: The German Corporate Governance Code provides recommendations on responsible corporate governance and regulates the cooperation between companies and investors.

It is important to emphasise that these laws and regulations do not specifically address sustainable investments, but are general rules for investments and financial services. Nevertheless, they also contain regulations on the consideration of ESG criteria and the avoidance of conflicts of interest.

Investors and fund managers should therefore carefully inform themselves about the relevant laws and regulations and, if necessary, seek legal advice to ensure that their investments comply with the legal requirements and are sustainable in the long term.

An extract from Section 239 of the German Commercial Code (HGB):

“Every merchant shall keep books of account and show in them his commercial transactions and the situation of his assets in accordance with the principles of proper accounting.”

This legal text is important to ensure that companies offering sustainable investments document and present their business and financial situation in a transparent manner. Accounting is an important part of compliance as it allows business processes to be documented and controlled. Investors should therefore ensure that companies in which they wish to invest keep transparent and proper accounts.

The market and its development

The market for sustainable investments is growing worldwide and offers investors more and more opportunities to invest in sustainable projects and companies. Below are some aspects of the sustainable investment market:

1.Growth: The market for sustainable investments has been growing steadily for many years. According to the Global Sustainable Investment Alliance (GSIA), the volume of sustainable investments worldwide totalled 35.3 trillion US dollars in 2020.

2.Diversity: The market for sustainable investments is very diverse and includes a variety of investment forms, such as green bonds, sustainable investment funds, microcredits or renewable energies.

3.Regional differences: There are regional differences in the market for sustainable investments. According to the GSIA, Europe accounts for most sustainable investments, followed by the USA and Canada.

4.Impact: Sustainable investments can also have a positive impact on society and the environment, for example by promoting the expansion of renewable energies or the protection of biodiversity.

It is important to emphasise that investors who want to invest in sustainable investments should carefully consider whether they match their ideas and goals. A careful analysis can help identify potential risks and opportunities and make an informed investment decision.

Larry Fink, CEO of the investment firm BlackRock: “In the near future – and sooner than most anticipate – there will be a significant reallocation of capital”.

This shows that sustainable investments are becoming more and more important and that a reallocation of capital towards sustainable projects and companies is taking place.

Risks and opportunities of sustainable investments

Sustainable investments offer both opportunities and risks. It is important to weigh these carefully before deciding to invest in sustainable investments. Some of the opportunities and risks of sustainable investments are listed below:

Opportunities:

  • Positive impact: Sustainable investments offer the opportunity to make a positive contribution to society and the environment.
  • Promoting innovation: Sustainable investments can also help to promote innovative companies and projects.
  • Return: Sustainable investments can also offer an appropriate return.

Risks:

  • Sustainability risks: Sustainable investments can also involve risks, for example if a company gets into difficulties despite good ESG criteria.
  • Regulatory risks: Sustainable investments can also involve regulatory risks, for example if a regulatory authority introduces new requirements.
  • Information risks: Sustainable investments often require extensive research and analysis to ensure that the investment is in line with one’s own ideas and goals.

In order to carefully weigh the opportunities and risks of sustainable investments and to consider the legal aspects, it is advisable to consult an experienced lawyer. A lawyer can help to examine the legal and regulatory aspects and uncover possible risks and opportunities.

A verified quote from David Blood, co-founder of the investment firm Generation Investment Management, is: “The greatest global challenges of our time – including climate change, resource scarcity and demographic change – create significant investment opportunities for investors who are willing to think long-term and invest in companies that develop innovative solutions to these problems.” This shows that sustainable investments can also be a sensible investment in the long term if they are carefully examined and analysed.

How does a lawyer help investors with sustainable investments?

An experienced lawyer can help investors with sustainable investments in many ways. Some aspects are listed below:

  1. Advice: A lawyer can help investors to carefully consider their investment decisions and identify possible risks and opportunities. The lawyer can also assist in the selection of sustainable investments and the review of prospectuses and other documents.
  2. Compliance: A lawyer can ensure that investors and fund managers in sustainable investments comply with relevant laws and regulations and meet record-keeping and documentation requirements.
  3. Contract law: A lawyer can help investors review and negotiate contracts related to sustainable investments to ensure that their interests are protected.
  4. Dispute resolution: In the event of disputes or liability issues, a lawyer can help investors represent their interests and assert their claims.

It is important to emphasise that investors who wish to invest in sustainable investments should carefully consider their investment decisions. Legal advice can support this and help identify potential risks and opportunities. In case of liability issues or other legal problems, it is advisable to consult an experienced lawyer.