Investing sustainably How to successfully make green investments

How to combine returns and sustainability, how to identify a sustainable investment and what to look for when selecting and buying.

Green is the new gold: Sustainable investments are becoming increasingly popular on the financial market. More and more investors are convinced that their capital can make a difference. There are societal, environmental and social challenges that you can support with your money and at the same time build and expand wealth.

Sustainability and returns do not have to be mutually exclusive. Studies have repeatedly shown that sustainability criteria in investments have an above-average positive impact on economic success.¹ Attractive returns: check. 

But sustainability is not always truly sustainable: not all investment products are always as green as they promise. So, in order to be able to invest in a truly sustainable way, you need to understand what you need to look out for and what lies behind each sustainable investment form. 

But how do you recognise “green investments” that suit you? And which ones are actually having an effect? This article serves as a guide to answering the most important questions about sustainable investments.

The concept of sustainability is rooted in forestry, according to prevailing opinion. In 1713, Hans Carl von Carlowitz, Freiberg's regional mine manager, faced running out of his most important resource, wood, due to the increasing silver mining.

Carlowitz was therefore convinced that there had to be “continuous, consistent and sustainable use” "without jeopardising the survival of the land"². In short: you should not fell more trees than can grow back in the same period of time. 

The definition of sustainability in the Brundtland Report of the World Commission for Environment and Development in 1987 is based on this idea:

In particular, the pioneering United Nations conference in Rio de Janeiro in 1992 made the concept of sustainable development known worldwide as an international mission statement.  

In 2015, the United Nations included this aspiration of sustainable development in its 17 Sustainable Development Goals (SDGs). According to these goals, by 2030, decent work should be made possible, clean energy sources developed or sustainable production and consumption patterns stimulated, among other things.

Sustainability can be as multi-faceted as life itself – but at its core, three dimensions always emerge when using the term – the interplay of social, environmental and economic sustainability. This triad is also known as the triple bottom line or sustainability triangle. 

In this process, the environment, the economy and social affairs intertwine – at their intersection, is the principle of sustainability. A healthy environment forms the basis for a peaceful society in which a thriving economy can operate, which in turn promotes a healthy environment.

The term ecology literally means: study of the household. It refers to the cycle of nature without waste and wastage, but with energy and resources that move in cycles. Their interplay of nutrients, climate, tides, etc. forms the basis for all life on the planet – and thus also for human society and the economy. 

For this basis to continue to work, humanity is committed to protecting the environment. This includes the sustainable use of finite resources as well as measures to preserve biodiversity and the greenhouse gas balance in the atmosphere (climate protection).

The social dimension of sustainability includes intragenerative justice: between people in North and South, East and West, and between present and future generations. This includes fair and respectful interaction with each other, equal opportunities and respect for human rights.

The cohesion of society supports, among other things, the promotion of education, dialogue and culture.

A functioning economy is necessary in order for goods and services to be exchanged and human needs to be met. If a solution is not economically viable, there are no means to continue offering and distributing it.

This is why sustainable innovations and offerings must always have the economy in mind and deliver verifiable added value.

Sustainability means future viability. Those who invest in sustainable companies can also benefit economically from their alignment. The reason for this is that the competitiveness of such companies is permanent because growth is not dependent on resource consumption.

In addition, the demand for sustainable offers is on the rise – customers are increasingly aware of the consequences of their consumption and are looking for sustainable alternatives. 

Quality and price are no longer the sole focus; attention is increasingly focused on the entire value chain. Questions are asked about the origin of raw materials, working conditions along the supply chain and any negative effects of production and disposal.

As a result, consumers and investors are exerting ever-increasing pressure to achieve responsible corporate governance. 

Sustainability is becoming a must, from a nice-to-have feature to a hygiene factor. Ignoring customer and supplier expectations carries reputational risk. Those who do not keep up with political developments such as the Paris climate targets, the sustainability reporting obligation or the Supply Chain Act also bear a legal or at least financial risk in the medium term. Many investors are less and less inclined to support companies that do this.¹

Instead, institutional investors in particular have in recent years increasingly supported companies that are giving themselves a head start in terms of innovative capacity and employee retention through environmental and social measures and thus also offer economic growth opportunities. Exemplary of this double success are the sustainable companies in the food and beverage industry. They achieved an average EBIT margin six percentage points higher than less sustainable companies in the industry.²

The aim of investing sustainably is to include environmental, social or ethical aspects in your assessment of a financial investment in addition to the traditional criteria of safety, profitability and liquidity. A sustainable investment is therefore not only characterised by a purely economic, but also by a sustainable impact. 

However, the term “sustainable” is not legally protected and is not clearly defined for all offers. It is therefore possible for products to be described as green, environmental or socially sustainable without meeting certain criteria. The government has not defined exactly what an “ethical investment” should be or how “green money” can be invested. So green is not always truly green. 

According to some calculations, almost half of Europe’s assets are already sustainably invested. A promising determination – but you shouldn't simply trust it. After all: there are "50 shades of green". These shades of green range from less demanding to highly impactful. Sustainable investing is a spectrum that is frequently exploited by many providers in the sense of greenwashing. 

At one end of the sustainability spectrum are investment approaches that act using exclusion criteria. The emergence of this approach is, in a way, the birth of sustainable investment. According to the Global Sustainable Investment Review, over 40% of sustainable investments in Europe are invested according to this approach. 

The methodology is that funds that work with (self-)determined exclusion criteria define the exclusion of certain investments, companies or sectors. For example, armaments, tobacco or oil extraction are excluded – the rest of the investment universe is therefore considered sustainable, as measured by the defined negative criteria. This excludes investments that are not societally, environmentally or socially sustainable. 

At the other end of the sustainability spectrum is impact investment. The Federal Impact Investing Initiative describes this investment approach as one in which “positive social or environmental impacts are direct, intended and demonstrable”. Transparency, intentionality and demonstrability combine to form an investment approach, which aims to achieve an active and solution-oriented positive impact. Impact therefore goes beyond exclusion criteria in several respects.

The following key questions can help to navigate the spectrum of sustainable investments:

1. How direct is the investment’s connection to the real economy?
   To address a physical problem (such as increased greenhouse gas concentration) in the real world, the solution must also be rooted in the real world – for example, in the form of concrete projects to generate renewable energy such as wind or solar farms, which actively contribute to mitigating climate change through CO₂ avoidance. Tangible assets in the area of renewable energy are therefore suitable for impact investments, as they can have a direct effect in the real world.
2. Where does the investment capital go?
   A relevant consideration here is also whether and how investment capital ultimately flows into real economic activities or whether they circulate within the financial market. Does the investment capital flow to the previous owner of the units, for example, such as when buying units in sustainable ETFs on the stock market (secondary market)? Or does the capital flow into impact-oriented new investments that back concrete social or environmental projects (primary market)?
3. How specific is the objective?
   Impact investments aim to make a positive impact at a social or environmental level, such as climate protection, the transition to a circular economy or the restoration of biodiversity and ecosystems. With these environmental objectives in mind, specific outputs and results are defined, such as a certain amount of green electricity that must be produced. Impact investments follow the principle of “do no significant harm” – according to which an environmental objective must not have a negative impact on another objective.
4. How much information on the impact is provided to investors? (transparency)
   Impact investments combine financial returns with environmental or social sustainability – which is why it is also important to communicate transparently with investors whether and how this impact is achieved. This can include, for example, reporting on CO₂ avoidance or the amount of green electricity produced.

What is important to you when investing? Sometimes it’s easier to say what you don't want. Some investors find genetic engineering ok, others don't. Some have nothing against tobacco or gambling; others don't want to use their money to promote such industries. Some industries and investment areas are controversial. They can be excluded in whole or in part when investing – by means of exclusion criteria.  

With negative selection, you put certain industries, countries or business practices on your personal blacklist. This means that you will no longer lend your money to companies that produce or sell weapons, armaments, drugs, alcohol, tobacco, gambling, pornography, genetic engineering, nuclear power or fossil fuels such as oil, coal or gas.

You may also want to exclude commodities or gold because their extraction often causes environmental damage and human rights violations. For government bonds, you can exclude countries where the death penalty and child labour are still permitted or which have a high rate of corruption.

In contrast to exclusion criteria, positive criteria define all areas that should support your own sustainable investment. Depending on your values, these could include renewable energies, sustainable buildings and green mobility, organic agriculture and forestry, alternative education, affordable housing or microloans for people below the poverty line. 

You can explicitly invest money in companies that are particularly committed to protecting resources or employee rights. Bonds from countries with a rule of law and democracy that are committed to respecting human and labour rights (e.g. OECD, ILO) or have ratified the Paris Agreement on Climate Change may then also be attractive.

When it comes to impact investing, it’s about the concrete positive impact of your money. Here, it's clear that money has power. It makes a difference whether you simply don't invest in non-sustainable investments or explicitly in meaningful investments – in accordance with your own values.

This is what the impact investing market specialises in. Impact funds achieve both – they directly combine the financial return with measurable added value for society and the environment.

Every industry has its black sheep, but also its best-in-class. If – unlike the negative criteria approach – you don't want to exclude industries, but promote the best in each sector with your money, then it would be prudent to follow the best-in-class approach.

These industries also include manufacturers of particularly efficient cars with combustion engines, for example. They aim to make sustainable improvements in the automotive sector, which is ultimately one of the largest employers in Germany. Benefits include environmental management and increased efficiency in resource and energy consumption.

ESG criteria can be thought of as a kind of seal of quality for the financial industry. The abbreviation stands for “Environmental”, “Social” and “Governance” - i.e. environmental, social and corporate governance sustainability. Investments following the ESG approach consider these aspects, but their weighting can vary considerably. 

An involvement in environmental matters includes, for example, climate change mitigation, reducing energy consumption and conserving natural resources. The social sustainability (social) aspect includes, among other things, good working conditions with minimum standards for safety and health as well as the prohibition of child and forced labour. Ethical corporate governance includes, for example, the fight against corruption or clear compliance guidelines.

The market for sustainable investments is now almost as broadly based as the conventional financial market. Most well-known investment products are also available as a sustainable version: equities, funds (including ETFs), bond funds, call money, fixed-term deposits and bonds. 

Even in the grey capital market, which is less regulated, but also offers startups and smaller projects access to investment capital, environmental and ethical offers are booming, e.g. as crowdfunding or subordinated loans. The following overview shows some of the most important sustainable forms of investment. 

For each of the financial products described, it must be remembered that they also work without sustainability, but sustainability can be financed with their help. It is therefore worth examining each investment in light of the core questions mentioned at the beginning:

1. Does this investment have an impact on the real economy?
2. Where is the money invested actually used?
3. How specifically is the money used for sustainability?
4. How transparent is this?

One of the safest but least profitable forms of investment is the good old bank account. In the current low-interest phase, you are losing money here in the long term as inflation leads to a loss in value. In addition, some banks charge an account management fee. After all, your money is available here in a relatively flexible way.  

But what does a current account have to do with sustainability? Just as much as your balance! This is because the “deposit money” that a bank receives from savers on the one hand, is granted in the form of loans on the other. With a normal current account, you do not know what your money is actually used for and what it does.  

Your assessment of whether and how the money is invested sustainably can therefore only be made by the choice of bank. See what sustainability criteria a bank applies to lending and make this a decision-making criterion for your account choice.

There are many opportunities to invest in sustainable projects or companies directly. Many of them are outside the investment market, which is more strictly regulated by BaFin. This is often easier for companies. However, there is also a higher risk for investors because the market is less regulated.  

Crowdinvesting is an investment form that is growing in popularity. In crowdinvesting, many people (the crowd) invest in a project or start-up, from cargo bike rentals to food start-ups or a chocolate factory in a developing country. Various websites offer entrepreneurs a platform to obtain financial support. Other providers invest in sustainable real estate and the energy transition. 

Unlike crowdfunding, crowdinvesting is not just about a consideration or donation for an idea, but about an investment as a co-owner or lender. The contract is often structured in the form of a subordinated loan with an expected interest rate. As with start-ups, the risk of a total loss is often very high and interest rates tend to be low. You should therefore see these investments as a very small part of your portfolio.

Do you know of a listed company and believe that it will operate sustainably and be successful? You will then be able to purchase shares in the form of equities. By issuing equities, companies receive equity capital that they can use to research sustainable innovations, for example.  

The advantage is that you can put together your portfolio according to your values with individual equities. Compared to other forms of investment, equities offer high potential returns and have comparatively low costs (e.g. because no management fee is due, such as for an investment fund). 

At the same time, you can expect higher volatility and therefore higher risk. The time required to select your equities should not be underestimated. You must also regularly check whether you should still hold a company’s securities or if you would rather sell and replace them.  

In principle, you must be able to withstand price fluctuations on the stock exchange. For good risk diversification, it is assumed that active investors require around 10–30 individual securities in their portfolio. However, if you take into account not only financial but also sustainability aspects in the evaluation, the effort is correspondingly high.

Sustainable investment funds do not differ from conventional funds in terms of their basic operating principle: An investment fund invests your money – depending on the type of fund – in various financial instruments such as shares, bonds or in tangible assets such as real estate. They can be categorised by product type, theme and asset management. 

If you would like to invest in funds, many different product types are available: 

Equity funds acquire individual shares from various companies that focus on sustainability aspects.  

Green bonds (pension funds) allow your money to flow into bonds (government bonds or corporate bonds), which exclude certain sectors and practices, for example. 

Real estate funds finance buildings such as residential complexes, public institutions or factories; specific ESG criteria can be applied here. 

Mixed funds invest in different categories, although the composition may be weighted differently and follow certain ESG criteria. 

Umbrella funds invest in several investment funds at the same time, which spreads the risk more widely than with an individual fund, but also makes it even harder to see which specific companies and projects your money flows into. 

Sustainable thematic funds invest in certain sectors. Here, the product type is usually less important than the themes and industries in which the fund invests money. Accordingly, they are also managed as green funds, environmental funds or social funds. Common topics you can choose from include:

• Climate change mitigation funds: These focus on companies that, for example, operate in a particularly energy-efficient manner and actively reduce their carbon emissions.
• Renewable energies: These include renewable energy funds such as solar funds or investments in wind power. These are quite often tangible assets. 
• Renewable raw materials: This is where you can find funds focusing on the timber industry, for example.
• Microfinance funds: These funds help people in poorer countries to run their own business by providing loans.

For the sustainability assessment, it is also relevant how the investments are managed. A distinction is made between funds according to whether an index (such as the DAX) is tracked (passive funds/ETFs) or invested by fund management in selected investment forms, e.g. equities (actively managed funds).

Passive funds track the performance of an index, which is why they are also called exchange traded sustainable index funds or sustainable ETFs (Exchange Traded Funds). They are considered more cost-effective because there are no active management costs. The return on ETFs therefore passively follows the general market development. Meanwhile, five companies make up around four fifths of the global ETF market.⁴ 

Two exemplary equity indices for sustainability are the MSCI World Socially Responsible Index (SRI) and the Dow Jones Sustainability Index (DJSI). Both indices mainly list American companies. The former includes about 400 companies and trades after excluding critical industries such as alcohol and pornography. The DJSI has 600 companies that also follow specific exclusion criteria and are among the 20% strongest on the stock exchange in each sector.

For actively managed sustainable funds, fund managers are responsible for the management and investment of the fund assets. They monitor the environmental and/or social performance of the companies and governments represented in the respective fund.

In the event of negative developments, they can sell corresponding shares or bonds and switch to more sustainable companies. They take ESG criteria into account and incorporate sustainability expertise into the selection of equities. The criteria that funds apply in terms of sustainability can vary greatly. 

The fund managers are bound by the Articles of Association, which specify, for example, the quotas for asset classes and themes the fund invests in. The managers also have the opportunity to react if the economic performance of companies is at risk of falling sharply. A fund management fee is charged for this selection and monitoring service.

Investment forms such as impact funds combine two objectives: an attractive return and a positive, measurable contribution to sustainability. This sets them apart from ESG funds: 

• ESG strategy funds incorporate ESG aspects (environmental, social, governance) into the investment strategy, for example,. through exclusion criteria;
• Impact funds supplement the investment strategy with concrete ESG objectives, the achievement of which is measured and communicated transparently.

Impact funds focus on future-proof investments with a sustainable impact. This is about having an effect in the real economy and making it more sustainable in the long term. This results in numerous innovative investment opportunities, such as the expansion of renewable energies: with their investment, investors can drive one of the largest growth markets – renewable electricity production. 

This promotes regenerative energy generation, which is already increasingly displacing conventional energy generation. Investors not only take advantage of good potential returns, but also make a measurable contribution on the way to a sustainable energy economy. 

One such impact fund is the klimaVest ELTIF (European Long-Term Investment Fund). This tangible assets fund is invested in more than 25 wind farms and solar power plants across Europe. This not only ensures attractive returns, but also a measurable impact on the energy transition.

If you opt for sustainable investments, you can benefit multiple times. Your investment helps you to build up your assets and at the same time support the protection of livelihoods and rights for generations living today and in the future. 

The logic is simple: your money is working. But you can decide for whom and for what. Investing in CO₂-saving technologies contributes to climate protection. Those who invest money in microfinances contribute to combating poverty. Those who support mixed forest afforestation promote biodiversity and combat species extinction. 

Does investing sustainably reduce potential returns? It is logical to assume this because specific measures, e.g. for climate protection, initially incur costs.

The prices of cheaper products do not reflect the true costs – these are passed on to society, people in other countries and later generations, i.e. they are externalised. This disadvantages companies that voluntarily respect human rights and conserve resources, for example.

And yet financial analysts time and again observe an interesting phenomenon: companies that operate with sustainability requirements perform above average overall or at least as well as traditional investment products. This is because companies don't just have a narrow view when it comes to sustainability. Their potential returns are higher because they deal more and more thoroughly with the risks in their supply chain and the market. 

This increases their resilience – the ability to deal with changes flexibly and also to weather crises or to recover better from them. In addition, the demand for environmental standards, clean technologies and fair economic practices continues to grow, providing a competitive advantage for sustainable companies. 

It is therefore no wonder that sustainable investments are increasingly on the up and up: they enjoy double-digit growth rates in Germany. The market for sustainable investment funds grew by around 65% from 2020 to 2021, and amounted to 409.5 billion euros.⁵

As with all investment types, sustainable investments also entail risks. Above all, you should pay attention to diversification. If you invest only in the shares of a sustainable food manufacturer, you will lose all your money if it goes bankrupt.

If you only invest in wood funds, droughts or forest fires could painfully reduce their returns. You should therefore spread the risk across different themes and products in order to become less dependent on the investment risks of individual assets. 

It also makes sense to look at risk classes. There is a wide range in the risk/reward ratio between low-risk and high-risk investment opportunities. At this point, your personal "risk appetite" becomes the deciding factor.

You should look very carefully, especially when it comes to niches and the grey capital market, which is less regulated. Think carefully about what loss would be painful for you.

Investors want to invest capital sustainably – but how do they find the right product? 

Eighty percent of investors have not yet invested in environmentally sustainable capital investments – according to a representative survey on sustainable investments by Commerz Real. And although two thirds of all participants would like to invest in products that make a measurable contribution to climate protection, 80 percent do not know anything about such products. But how do you identify them? 

A first indicator of a green investment opportunity can be the name. Funds often have “Sustainability” or “Sustainable” and frequently “Responsible” in their name. In addition, terms such as eco, ethical, climate, fair or ESG may indicate a sustainable offer. 

However, there is no uniform definition of sustainable investments. Entire rating agencies and research institutes are concerned with criteria against which environmental, social and responsible economic activity could be measured. So how can you tell if an investment is right for you? 

This short checklist can help you to check your investments in sustainable financial products:

Some funds indicate in their name which sectors they exclude, for example, an investment product with “ex weapons” specifically excludes weapons. Animal testing or livestock farming, on the other hand, are not excluded. 

Positive criteria: What do you want to support with your funds? 

• For example, CO₂-free energy, sustainable forest development or organic agriculture 
• For example, a contribution to the energy transition, eradication of poverty, equal opportunities 
  
  

Impact investment: Is the sustainable contribution measurable and verifiable? 

• Are the investment objectives clearly stated and measurable? 
• Is the product’s understanding of sustainability based on a recognised definition, such as the EU Taxonomy? 
• Does the investment actually contribute to the capital increase for the achievement of a specific objective? 

Sustainability seal: What quality seals exist for this category?

• FNG seal: The Sustainable Investment Forum (FNG) has a number of sustainable investment funds. The focus is on the exclusion of nuclear power, coal (mining and power generation), or the arms industry, among other things. In addition, there are transparency criteria for compliance with human and labour rights, environmental protection and anti-corruption.  
  
  
• ECOreporter seal: This label is awarded to sustainable investments and banks that undergo a three-stage review process. Negative criteria include, for example, the arms industry, exploitative child labour according to the ILO standard, totalitarian regimes and practised death penalty, addictive substances or animal testing. Potential investments undergo a three-stage review process. 
  
  
• Austrian eco-label for sustainable financial products: Its exclusion criteria include fossil energy and nuclear power, genetic engineering and defence companies. ESG criteria are decisive in the selection process. The ratings range from 0 (not achieved) to 3 (above average achievement). 

ÖKOTEST has examined other quality seals for sustainable investments.⁶ Although the minimum standards of all these criteria and labels can provide guidance, they will not necessarily reflect your own values. They also use exclusion criteria in particular. However, this largely lacks the consideration of the extent to which an investment has a positive impact and whether it is measured and communicated transparently. 

Confidence check:

• What do independent bodies say? Rating agencies examine in more detail what companies, countries or funds promise and then deliver in terms of sustainability. They analyse sustainability reports (CSR reports), annual reports, website content, media articles, but also opinions by critical organisations. The results of the rating agencies vary greatly in some cases depending on which ESG criteria they weight more strongly. 
  
  
• Who is the issuer? How long has the issuer or the fund been on the market? What is the fund’s trading volume? Is the product distributed on the primary or secondary market? Is the information available in German? Questions like these help you to assess the level of confidence you can have in the sustainable investment. 

There is probably no such thing as the perfect sustainable portfolio. A good “recipe” with the best mix for you depends on your asset situation, the phase of life you are in, your risk appetite and your value.

Anyone who wants to restart their investment strategy or enrich their existing investments with sustainable alternatives can still follow a few steps. What might a process for sustainable investment look like?

1. Define your investment objectives 
   
   First, take into account the fundamentals of financial investments by asking critical questions such as the following and answering them for yourself: 
   
   
   • How much capital do I have, how much do I earn and how much do I want to invest as a one-off or regularly?
     
   • How do I feel about risk? What percentage could I tolerate losing? What is the risk spread of my previous investments?
     
   • What is my investment horizon? What stage of life am I in? How long and how much of my investment amount can I dispense with?
     
   • How much time or what level of costs (for management, administration and consulting) am I willing to invest? Will I be able to regularly monitor my investments or will I only very rarely find the time to deal with them?
     
   • What values are generally important to me in terms of my money? Is there a weighting – e.g. in terms of safety, returns, environmental protection and social aspects? What compromises am I prepared to make? 
   
   
2. Determine your exclusion criteria 
   
   Do I want to exclude certain assets from my portfolio, such as shares in certain companies or government bonds from certain countries whose sustainability activities do not seem adequate to me? 
   
   
3. Define your thematic areas (positive criteria) 
   
   Are there certain thematic areas that you would like to support with your investment, for example infrastructure measures for renewable energies? 
   
   
4. Research suitable investments 
   
   As always, diversification reduces risk, which means that you should not invest all your assets in one asset class (e.g. only equities or only funds) or one thematic area (e.g. only organic farming).
   
   For example, if you already have a direct holding in a forest, a sustainable defensive fund with a higher proportion of bond funds (government bonds in countries that meet ESG criteria) could improve your risk diversification. 
   
   
5. Open custody accounts and/or accounts 
   
   Open a securities custody account. This can often be done at the bank where you already have a current account, but it is worth comparing providers. When making your selection, you should pay attention to the long-term orientation of the financial institution on the one hand and to the lowest possible custodian fees on the other. The initial charges on equity securities or funds also differ. 
   
   
6. Compile your portfolio and savings plan 
   
   Consider whether you would like to make a one-time investment or save with a regular amount in the form of a systematic investment plan (SIP). The timing of a one-off investment can be critical to your returns. Regular investment ensures that opportunities and risks are spread – and you can start at any time. 
   
   With both options, it makes sense to consider a long investment horizon of at least 10 years, if possible. What’s more, you do not have to reallocate all your assets at once. It is better to start small than not at all – because every cent in sustainable investments finances a future that corresponds to your values. 
   
   
7. Demand transparency 
   
   As an investor, you have influence with your money and voice. Read reports on the impact of your investment and request concrete reports on how sustainability goals are being achieved. As a shareholder, you can also ask questions and – for example, in conjunction with other critical shareholders – work towards sustainable changes. 

Traditional or ethical investments – each asset class comes with costs and fees, regardless of the sustainability aspects⁸.  

You generally pay withholding tax (formerly: capital gains tax) to the government on profits such as interest, dividends, distributions and capital gains. The flat-rate saving amount or allowance is 801 euros for individuals and 1,602 euros for married couples (as of 2021).

You should submit a declaration for exemption from withholding tax so that your bank does not automatically pay the tax to the tax authority. Income above the allowance is taxed at 25%. 

Current, call money and fixed-term deposit accounts, for example, incur account management fees and in some cases also costs per booking. Accounts with sustainable banks are not free of charge because they want to make the costs for the banking service transparent to their customers via the account fee, which arises due to the low interest rate policy, digitalisation and increasing regulation. 

When purchasing equities, you may pay custodian fees (e.g. 1.5% of the market value) as well as an initial charge or an order fee to the bank (0.25% to 1%). As a rule, there is no difference between sustainable and traditional providers in this respect. 

For funds, custodian fees range between 0.0% (free) and 0.1% of the fund’s assets. Certain fees such as initial charges and exit fees should only be accepted for funds if the investment is still profitable over a long-term investment horizon. These vary depending on the type, e.g. 3% (for pension funds) or 6% (for equity funds) of the investment amount.  

In the case of passive ETFs, the TER (Total Expense Ratio) includes these costs. This expense ratio includes all the management costs of an ETF provider, i.e. the licence fees for the index, the management fees and the marketing budget. These are usually between 0.1 and 1%. 

Actively managed funds are subject to a one-off initial charge (frequently 5%) and an annual management fee (e.g. 1.5% to 2.5%) which is used to pay the fund management and distribution fees (known as portfolio commission). In addition, performance fees may be charged to reward particularly good performance by management.  

When it comes to sustainable funds, managers usually rely on a hand-picked selection. In the case of impact investments, the cost of measuring and reporting on sustainability must also be factored in. In some cases, this results in higher costs than with traditional providers, which is however just as often offset or even rewarded by better performance. 

In sustainable investments, the usual investment costs are compensated for by additional opportunities: studies show that companies with a very good sustainability rating have a higher profit margin, which can be over 12 percentage points8. In addition, there are certain investment opportunities where the projects are supported by the state, e.g. clean power generation under the German Renewable Energies Act (EEG). It obliges grid operators to purchase green electricity and provides financial support to producers. Investors can then also benefit from this. 

For some investors, the name of the game is capital preservation, not returns. The strategy of some impact investments addresses this by partially or fully reinvesting your returns to maximise the positive impact.