Sustainability research: Investments for cooperative banks and institutional investors

Since 2011, as part of its sustainability research activities, DZ BANK has offered a comprehensive audit and consultancy service for investments in equities. In 2015 and 2016, the experts at DZ BANK Sustainable Investment Research introduced a sustainability rating for states and SSAs (supranationals, sub-sovereigns, agencies) and extended the corporate rating to include companies that only issue bonds. They have therefore successfully completed the planned integration of sustainability criteria into the fixed income asset class and are working with fundamental analysts and other departments to generate practical investment ideas from sustainability trends.

The sustainability research service is primarily aimed at cooperative banks and institutional investors in Germany and other countries that, due to regulatory requirements and growing customer demand, are increasingly having to evaluate their investments and product portfolios using sustainability criteria.

DZ BANK Research’s sustainability rating is based on a holistic investment approach and enables institutional investors, investment managers, and cooperative banks to balance expected returns with sustainability aspects when making investment decisions.

Market trend for DZ BANK’s sustainability research remains positive

The topic of sustainability went mainstream a long time ago. Traditional investors are increasingly incorporating sustainability into their decision-making processes, as can be seen from figures published by the European Sustainable Investment Forum (EUROSIF) in November 2016. According to that data, there was a 22 percent increase in the assets subject to rejection criteria between 2013 and 2015, and they now make up around 48 percent of the assets under professional management in Europe. No other sustainable investment strategy is used as frequently across Europe.

This is boosting demand for our sustainability research. At the same time, our sector specialists are having to take greater account of sustainability issues in their analyses in order to be able to assess their impact on business performance.

The share of the overall European market accounted for by socially responsible investments is growing all the time. EUROSIF's study found that all responsible investment strategies achieved growth rates in at least double figures between 2013 and 2015. The rates of growth ranged from 14 percent (engagement & voting) to 120 percent (impact investment).

The very strong competitive position of sustainability research can be seen from the Independent Research in Responsible Investment (IRRI) survey conducted in autumn 2016. This survey once again found that Marcus Pratsch, who is in charge of sustainability research at DZ BANK, is one of the best sell-side analysts in terms of understanding and analyzing the opportunities and challenges facing companies in the context of sustainability.

A special sustainability rating method


In contrast to fundamental research, DZ BANK's sustainability rating system focuses on the long-term prospects and performance of the issuers investigated. To evaluate these issuers, our analysts examine around 150 aspects of environmental, social, and corporate governance in detail and weight them by sector as part of the multi-stage rating process. This creates a three-dimensional ESG rating (environmental, social, and corporate governance) that, internally, we only use as an interim result, thereby differing from conventional analytical models. It is supplemented by a fourth dimension based on economic sustainability indicators, and the final sustainability rating is expressed as a figure between 0 and 100.

This figure is used by our research team to classify issuers as 'sustainable' or 'not sustainable'.

Rejection criteria are applied first. According to these, DZ BANK excludes issuers from the sustainable investment universe if they:

  • contravene the fundamental principles of the International Labour Organization (ILO); violate environmental laws or internationally accepted minimum environmental standards;
  • breach basic human rights; or
  • carry out experiments on animals that are not required by law.

We also classify issuers as not sustainable if more than 10 percent of their revenue is generated in controversial business areas such as alcohol, tobacco, the nuclear industry, unethical forms of funding, or armaments.

Our classification of individual securities also takes account of sectoral (industry-specific) and cross-sectoral (applicable to all industries) sustainability thresholds, which require the securities to achieve a minimum number of points. Current controversies affecting the economy, environment, society, and governance are also factored in.

Issuers qualify for the sustainable investment universe if they exceed both the relevant sectoral threshold and the cross-sectoral threshold, provided that none of the aforementioned rejection criteria apply and they are not currently affected by any major controversies.

SSAs (supranationals, sub-sovereigns, agencies)

The SSA market is very diverse and bridges the gap between the worlds of government and corporate bonds. Because of their special characteristics, SSAs undergo an independent rating process by DZ BANK's sustainability research team and are not lumped together with traditional banks or diversified financials.

Just like corporates, SSAs are analyzed as part of an integrated, multi-stage EESG rating process. The experts take into account both firm and soft rejection criteria, dynamic sustainability limits, and recent controversies in order to then classify the SSAs as 'sustainable' or 'not sustainable'.


The EESG analysis used in relation to the sustainability rating for countries also focuses on issuers' future position. Here too, experts at DZ BANK identify the sustainable investment universe in three steps: Firstly, they examine the three traditional dimensions of sustainability – environmental (E), social (S), and governance (G) – and combine them to produce the ESG rating. Next, they factor in the economic (E) dimension of sustainability. Finally, countries are categorized as 'sustainable', 'transformation countries', or 'non-sustainable', with the analysts looking at dynamic sustainability limits, firm rejection criteria, and recent controversies.

Issuers that our analysts classify as ‘sustainable’ are awarded the DZ BANK Research seal of approval for sustainability and are identified as such in the unit’s publications. The ratings are used for more than 350 individual securities in the DZ BANK equity and bond universe. Around 25 percent of these securities have been classified as sustainable by the sustainability research team. After evaluating countries’ sustainability, the analysts categorize them as ‘non-sustainable countries’, ‘transformation countries’, or ‘sustainable countries’. At the time this report was written, 22 of the just over 145 countries analyzed were designated as ‘sustainable’. Another eight were assigned to the ‘transformation countries’ category.

Since 2012, the DZ BANK Research seal of approval for sustainability has been used in all equity research publications. In 2016, the first technical steps were taken to integrate the seal of approval into publications focused on bond research. The integration is expected to be fully completed by the end of 2017/early 2018. The seal of approval is also mentioned in what is known as the master list, which the Volksbanken Raiffeisenbanken, the local cooperative banks, use as an advisory tool. This list contains comprehensive market information and provides sustainability-related information on the companies analyzed in equity research.

Focus on the bonds asset class

Sustainability analysis again focused on bonds as an asset class in 2016. In February, for example, the experts at DZ BANK introduced a sustainability rating for supranationals, sub-sovereigns and agencies (SSAs). Supranational issuers include institutions in which more than one state is directly involved; sub­-sovereigns are public-sector entities at regional and local level; and agencies have either a public-sector mandate or a very strong connection to the public sector. In September, the corporate credit rating was extended to include companies that only issue bonds.

Discussing the research

The sustainability research team talks to all customer groups and is the impetus for intensive networking aimed at marketing relevant products and embedding sustainability as an investment theme. This is illustrated by the following examples from 2016:

In March, Marcus Pratsch, Head of Sustainability Research, presented DZ BANK’s sustainability rating for states at two webinars organized by the UN Principles for Responsible Investment. In September, DZ BANK Sustainable Investment Research hosted its inaugural sustainability roadshow for issuers and investors in Singapore. Asia is seen as a highly promising hub for the topic of sustainability in the financial markets, and the sustainability research team was able to win plaudits for its expertise and give the participants substantial support in Asia’s nascent sustaina­bility market. At an international roadshow in the US capital, Washington, in December, the sustainability experts held a series of talks over several days with important issuers such as the World Bank, the International Finance Corporation (IFC), and the Inter­-American Development Bank (IDB). Sustainability in the financial markets, sustainable bonds, and the financing of a sustainable economy were among the topics of discussion.

At the sixth Taking ESG Into Account conference organized by the Society of Investment Professionals in Germany (DVFA), Marcus Pratsch, Head of Sustainability Research at DZ BANK, gave a detailed overview of the green bond market, stressed the significance of this still very young investment vehicle in the transformation to a green economy, and highlighted the opportunities and obstacles that will have a bearing on the future of the market. Pratsch also took part in a panel discussion for the Task Force on Climate-related Financial Disclosures (TCFD), which focused on the topic 'Climate change: Opportunities and risks – reporting in transition'. Here, he emphasized the growing importance of climate-change data in capital market communications and explained the benefits of an integrated reporting system from the analysts' perspective.

In 2016, the sustainability research team again organized numerous Corporate SRI Roadshows in Germany and abroad for major German companies such as BMW and SAP. The team also organized another SRI field trip, this time giving selected institutional investors the chance to visit BASF in Ludwigshafen. The event included talks on investor relations and other subjects as well as a factory tour focusing on sustainability.

In 2016, staff from DZ BANK's sustainability research team again attended various debates and panel discussions as speakers and contributed to surveys. They also organized training sessions aimed at making financial advisors and customers of the Volksbanken Raiffeisenbanken, the local cooperative banks, more aware of sustainability in the capital markets. The instructors also presented specific sustainable investment ideas. The sustainability research team actively approached institutional investors in Germany and abroad at the SRI Analyst Roadshows. In addition to obtaining the sustainability research team's publications, more and more customers are making use of SRI portfolio screening, a service in which specialists from DZ BANK Sustainable Investment Research review the customer's investment universe each month from a sustainability perspective.

DVFA commission on responsible investing

DZ BANK uses its membership of the Deutsche Vereinigung für Finanzanalyse und Asset Management (DVFA) [Society of Investment Professionals in Germany] as a trend barometer and to publicize its own topics of interest. Marcus Pratsch, who heads up sustainability research at DZ BANK, contributes to the DVFA commission on responsible investing. The commission's objectives include developing and updating sustainability standards as well as internationalizing ESG reporting. In addition, DZ BANK Sustainable Investment Research engages in dialog with other organizations such as the International Integrated Reporting Council (IIRC).

BMUB initiative: Financing the Green Economy

Demand for expertise in sustainability research extends across business, politics, and society. As head of the working group Environmental, Social & Governance Issues (ESG) and the Capital Markets – Definitions and Roles, Marcus Pratsch is supporting the Financing the Green Economy initiative set up by the German Federal Environment Ministry (BMUB).

In 2016, the total number of events run by the sustainability research team was over 25 percent higher than in 2015, another year-on-year rise.

Publication activities in 2016

Last year, we published various sustainability research studies on SRI-related issues as well as the 2016 CDP climate change report for Germany, Austria, and Switzerland.

We also published more Sustainability in Focus reports in 2016. In this series, which we had launched three years earlier, our experts analyze and comment on current sustainability topics in a concise and compact form. The reports focused on topics such as Bayer's takeover of the US seed producer Monsanto, the introduction of a buyer's incentive for electric cars in Germany, and the need to reduce fuel consumption and CO2 emissions in the automotive industry because of EU regulations.

Our range of analyses, which are very popular with institutional investors, was also made available to independent decision-makers, such as investment advisors and end customers, via the cooperative financial network's special mailing lists and via the local cooperative banks' VR-BankenPortal. When choosing the topics for our studies, we rely on the expertise of our two-strong sustainability research team. We also take account of the enquiries we receive from our customers and the discussions we have with representatives from various associations, such as the Sustainable Investment Forum. Our dialog with political bodies, such as the Rat für Nachhaltige Entwicklung (RNE) [German Council for Sustainable Development], and interaction and exchanges with representatives from industry and non-governmental organizations also steer us toward relevant issues.

We also forge specialist contacts for the exchange of market data, trends, and forecasts and the development of investment ideas.

Selected sustainability research studies in 2016

Sustainability rating for SSAs

Despite the great importance of the fixed-income asset class, sustainability aspects have played only a minor role in the bond market in the past. One positive exception in terms of the sustainability assessment of the issue itself is the SSAs segment, which has been a pioneer in the green bonds market for a number of years now. For an ever larger number of investors, the sustainability analysis of both the issue and the issuer is playing an increasingly important role, particularly in times of growing spread and rating volatility. What is true for countries and corporates is also true for SSAs: Credit ratings that are based solely on economic factors do not provide a complete picture of issuers from a sustainability perspective. That is why conventional fixed-income analysis needs to be extended to include environmental, social, and governance aspects. DZ BANK Sustainable Investment Research therefore aimed to develop a method of analyzing the long-term sustainability of SSAs (as distinct from traditional assessments of short-term creditworthiness) that makes up for the shortfalls both in the conventional credit ratings and in the sustainability ratings available on the market. The SSA market also has special characteristics that need to be taken into account. Because the SSA market is diverse and bridges the gap between the worlds of government and corporate debt, it is treated as an independent sector in our analysis. SSAs are not lumped together with traditional banks or diversified financials. The new method is an integrated, four-dimensional EESG analytical model.

European Championships of Sustainability

To coincide with the start of the 15th European Championships in France, DZ BANK Sustainable Investment Research pitted the 24 countries that had qualified for the soccer tournament against each other to find out which was the most sustainable. The sustainability rating for the 24 participants in the European Championships of Sustainability was based on our proprietary EESG analysis model for countries. The model goes beyond the traditional conception of sustainability, adding an economic dimension (E) to the sustainability rating of countries alongside the traditional aspects – environmental (E), social (S), and governance (G). This reflects the fact that we see sustainability as an investment factor. The traditional dimensions of sustainability ('ESG') are analyzed using 14 core indicators, which comprise 46 sustainability factors, or 'subindicators'. The economic dimension of sustainability is integrated using five core indicators comprising 13 subindicators. The format for the European Championships of Sustainability replicated the one used for the soccer tournament, with the countries put into the same groups that had been drawn on December 12, 2015. In this group stage (six groups each comprising four countries), the group winners and runners-up and the four best third-place teams qualified for the round of sixteen, when the tournament entered its knock-out phase. If a match from this round onwards is tied after 90 minutes, extra time is played. In our version, the country that had a higher EESG score went through to the next round. If both countries had same EESG score, a 'penalty shoot-out' determined the victor. For this, we used the historical EESG trend from the past five years. In the second part of the study, we present our EESG analysis method in detail and give an insight into our global sustainability rating for countries.

Sustainability rating for corporates

The publication is an update to our methodology study from 2011. The update was initiated because last year we began to extend our sustainability analysis approach to the fixed-income asset class. DZ BANK Sustainable Investment Research aimed to develop a method of analyzing the long-term sustainability of corporates (as distinct from traditional assessments of short-term creditworthiness and fundamental analysis) that makes up for the shortfalls both in the conventional credit ratings and in the sustainability ratings available on the market. The new method is an integrated, four-dimensional EESG analytical model. The analysis methodology used by DZ BANK's sustainable investment research team adheres to the principle of materiality. In the assessment of an issuer, it does not focus solely on internal policies, rules, processes, and corporate strategy, but instead also factors in the environmental, social, and long-term economic impact of products and services. Our methodology also takes account of the fact that sustainability is not a rigid construct, but a complex, dynamic process. The sustainable investment universe is identified in three steps. Firstly, the three traditional dimensions of sustainability – environmental (E), social (S), and governance (G) – are examined and combined to produce an ESG rating. The sustainability experts then factor in the economic (E) dimension of sustainability to produce an EESG rating. Finally, they categorize the companies as 'sustainable' or 'non-sustainable', with the former receiving DZ BANK's sustainability seal of approval. As part of this assessment, the analysts look at dynamic sustainability limits, firm and soft rejection criteria, and recent controversies.

CDP DACH 350 climate change report for 2016

As well as publishing its own research papers, the sustainability research team also prepared the 2016 CDP climate change report for Germany, Austria, and Switzerland entitled 'Auf dem Weg in eine Unter-zwei-Grad-Welt: Klimastrategien in DAX, MDAX, SDAX, TecDAX, SMI, SMIM und ATX' [Toward a Below-Two-Degree World: Climate Strategies in the DAX, MDAX, SDAX, TecDAX, SMI, SMIM and ATX]. The report compares the climate protection strategies and CO2 reduction targets of the 350 largest listed companies in Germany, Austria, and Switzerland and assesses how well these strategies are being implemented.

Since 2013, DZ BANK has been publicly committed, as a signatory investor of the CDP, to assuming greater responsibility for the issues of climate change and water in the investment world.

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