Green funds The 7 most common mistakes

12.04.2024 8 Reading Time

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Neither outdated nor risky, but profitable and forward-looking.

Those who want to invest their money today often no longer just focus on retirement provision, wealth building or their own home – they also want to do good at the same time. That’s all very well – but things aren’t always made easy for investors. With the increasing range of sustainable products, the green financial market is currently developing into a veritable jungle. 

It is not uncommon for investors to stumble across a product or two and ask themselves: are the claims really true? Which green funds really are green and what should ring alarm bells? Can sustainable investments really make a profit at all? 

This article is designed to guide you through the jungle and equip you with the knowledge you need.

What are green funds?

Green funds are investment funds that are positioned in the familiar investment triangle between profitability, safety and liquidity, while also pursuing sustainability as an objective. Environmental sustainability is paramount here. However, social or economic sustainability aspects can also be taken into account. 

However, the biggest problem here is that all of the terms around sustainability - green, ethical, environmental – that are popular on the financial market are not protected. Providers therefore have almost unlimited opportunities to give their conventional financial products a dark green coat, where they would otherwise have a clear red tint in terms of sustainability.

Misconception no. 1: "It’s all just greenwashing: take off the green glasses and all funds look the same"

If you take a closer look at what are known as sustainable financial products, you can quickly become disillusioned. According to Stiftung Warentest’s financial test 09/23, just under a third out of 934 investment funds have already failed to meet the minimum threshold - for example, the exclusion of fossil fuels, child labor, or controversial weapons.  

Sustainable strategies for investment such as the best-in-class approach can also make you wonder: in this context, the most sustainable best-in-class is filtered out of certain sectors. This doesn't sound like a bad thing at first – but it means that an oil company, for example, can suddenly be described as “sustainable”. It comes as no surprise that such figures and strategies are eroding confidence in green investments. 

Nevertheless, not all green investment products should be viewed in the same light. There are many investment strategies and products that investors can focus on with confidence.  

The ESG approach uses specific sustainability criteria to evaluate investments in terms of environment, social and governance. 

Impact investing even goes one step further: the sustainable impact is made measurable and transparent to investors. 

So anyone who is keen and motivated to inform themselves in-depth and maintain a critical approach will be successful in their search for green funds.

Misconception no. 2: “Green funds are a niche for tree huggers and 1968 protestors”

With this assumption, you are clearly on the wrong path. The demand for green investments is skyrocketing. The sustainable financial market is growing at double-digit rates – faster than the entire European market.  

The range of sustainable investment funds has grown more than fourfold since 2014 and there is particularly high interest in green investments among young people and those with a propensity for all things digital. No wonder, because the younger generation in particular will be particularly affected by the effects of climate change. The drive and the need to want to change something with all (financial) means takes on completely new dimensions here. 

However, sustainability is not a drawcard only for retail investors. Even experienced financial experts can see what’s happening in this area. From government subsidies to constantly rising stock market prices, long-term and lucrative developments are being noticed. So whether eco or financial shark in disguise – green funds are gaining ground.

Misconception no. 3: “Green funds mean well, but the returns suffer”

Even with this claim, it’s taking it far too easy. 

The following is true: The total expense ratio of green funds is slightly higher on average than of non-sustainable funds. This can be due to the fact that other services such as sustainability analyses or a careful selection in accordance with sustainability criteria are added. Investors should not forget that higher costs are associated with greater sustainability and a positive impact on the environment. 

This doesn't mean that sustainable investment funds will just leave you out of pocket. On the contrary. Green investments perform just as well, in many cases even better, than traditional financial products. A sharp focus on sustainability can also help to improve the performance and robustness of the product on the market. So if this is a concern for you, rest assured – there is definitely nothing to stop green funds from generating returns.

Misconception no. 4: "No wind, no profit... green funds are high-risk investments"

A typical question from regular critics when it comes to wind turbines is, what is the rationale behind them? "Without wind, the turbine stands still, does not produce electricity and does not earn any money.

In certain cases there is even a good deal of truth in it, for example in the case of an investment in a closed-end fund that has invested in one specific or just a few wind power or solar plants. So it has to be concluded that the risk that the investment will fail (for whatever reason) and thus impact the return is not so low after all – especially in times when climate-related disasters such as floods, unprecedented droughts and persistent forest fires are becoming more frequent. 

But there are many ways to avoid such risks. An open-end impact fund, for example, which distributes many investment assets across a wide range of countries and sectors, represents only a fraction of the risk for its investors.  

Misconception no. 5: “Social, sustainable & superduper secure – buzz words that I don't understand do not deserve my money”

With this motto, they are absolutely right – you don't have to follow every trend, especially when it comes to your own assets.  

But especially if a trend has proven itself, it can pay off to find out more about it. An almost endless number of articles that deal thoroughly with the sustainable financial market and associated green investments have now been written. Whether objective tests, podcasts, the Federal government's Impact Investing Initiative or our own glossary – these and many more sources allow you to make up your own mind

Another benefit is that you expand your vocabulary and thus protect yourself even better from financial faux pas and risks. Before your next green investment, you should ideally distinguish between sustainable equity funds, ESG ETFs and impact funds when researching and know the respective advantages and disadvantages. This is the only way to ensure that your money ends up where you want it to be – namely there where it will really make a difference.

Misconception no. 6: “Green funds only appease the conscience, but don’t do much for my portfolio”

Anyone who makes this assumption is barking up the wrong tree. Green investments are not merely symbolic contributions to soothe your conscience – this does not generally do them justice in any case. These products represent a completely new development on the financial market and can supplement your portfolio structure with strategically important aspects.  

For example, you can invest in assets such as renewable energy, which are still under-represented by many investors. This allows you to better balance your portfolio. You also invest in real tangible assets that represent a solid investment opportunity with predictable returns thanks to stable and long-term cash flows. However, green investments are just as suitable for adding high-yield aspects to your portfolio. When it comes to profit, these products can often do a lot more than many people believe. There are still funds with high returns here. 

With green funds, you can invest sustainably and choose from a wide range of sustainable and responsible investments – depending on what your portfolio needs to give you more than just a clear conscience.

Misconception no. 7: “Just a drop in the ocean – green funds have no real impact"

Quite the opposite: Only with your investment will long-term change happen for the next generation. Retail investors and their capital are indispensable for making a positive impact in the current fight against climate change. It is only with ongoing and, in the best case, increasing green investments that a change in the real economy can become evident. 

To make this goal at all tangible, the EU launched the ELTIF (European Long Term Investment Fund) financial instrument in 2015. Only then could products be launched on the market, enabling investments in renewable energy and positively contributing to the energy transition.

Measurable means, for example, reducing a fund’s CO₂ emissions in the long term by ensuring the disclosure of all emissions and aligning them with a defined cap.

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After all:

Green funds are not an outdated niche product without a real purpose and they are not a marketing trap that will just leave you out of pocket.  

Rather, with the right research, green funds offer you the opportunity to really make a difference with your money. In this way, you can make a significant contribution to the environment, both for yourself and for future generations, which pays off financially and morally.  

The time to make a difference is now.