In online seminars and podcasts, Thomas Kehl shows how investing works for beginners. With the war in Ukraine and sanctions came the question of how to save your money. Into the sustainable or rather into the armament.
Investing today is a tedious affair. If you want a return, you have to take care and know your way around. Constantly. It is the mantra of Thomas Kehl and Arno Krieger. And her business. The two started their YouTube channel Finanzfluss seven years ago. Two episodes every week about investing for the younger target group. The two struck a chord. Finanzfluss is now located in the trendy part of Berlin-Mitte and has over 900,000 followers on various channels from YouTube, Twitter, Discord and Instagram. There’s a live event every Thursday on Twitch and on campus is the paid program for small groups who want a personal hands-on. Financial flow is independent. Products are not sold, the team wants to empower people to make their own investment decisions. Especially on the stock market. We spoke to Thomas Kehl about sustainable investments in times of war and sanctions.
Star: war, sanctions, inflation. Can you still invest in ESG funds if you value returns?
Thomas Kehl: Well, for many, ESG is not a question of returns, but rather a moral or ethical decision. In addition, there is still no clear scientific answer as to whether ESG now generates more returns than normal funds.
Why shouldn’t ESG be high-yield?
ESG proponents emphasize the lower risk. Companies in the ESG fund must also meet strict guidelines with regard to corporate governance. Expensive scandals like Wirecard and others would be left out. The skeptics tend to see the “normal” funds at an advantage as a result of the ESG boom. If the big capital is no longer invested in “dirty” industries such as tobacco, then the cost of capital for these companies will inevitably increase – which then leads to higher returns on the investor side. So, the industries left out by ESG are becoming more attractive.
Ethical, social and corporate governance – sounds like criteria that depend on the point of view.
It’s correct. There are currently no clear rules. Let’s take weapons. The lowest common denominator for all ESGs so far has been: no weapons. Nobody needs bombs. But the war in Ukraine, which is under attack and fighting for its freedom, can suddenly look very different ethically. Suddenly, in the public perception, weapons as part of the defense of freedom are no longer so bad.
Doesn’t the EU specify these guidelines with the taxonomy?
In the future, the EU wants to ensure uniform standards with the taxonome. Nevertheless, the rating often remains a matter of interpretation. Suddenly, according to the EU taxonomy, gas and nuclear energy were again classified as sustainable and therefore ESG-compliant. The Germans, on the other hand, took to the barricades in vain, but other EU countries do not follow the German perspective.
How can there be a solution?
I think the ESG rating industry will have to split up more and broaden the range of products so that everyone can put together their own product.
There are already around 6,000 ESG funds in existence today. Who needs more?
There are so many because ESG is not a protected label. Everyone can build it according to their taste. Anything can be in an MSCI-ESG-World. The EU is currently trying to regulate this with the taxonomy.
Sounds complex. Would you recommend private investors to enter ESG at all?
It is simply more complex to invest in ESG than in normal funds. If you really want to know exactly what you are investing in, you have to look very closely. Of course, if you don’t want to go to the expense of this, you can buy any product with ESG or SRI in the name.
Aren’t there at least rough indicators for ESG, for those who don’t want to go into detail.
There are different degrees of hardness of ESG. The stricter the requirements, the fewer companies are in the fund. Let’s take the MSCI World Index, for example, with around 1,300 companies. Rating agencies now filter this list based on ESG criteria. ESG-Screened is the coarsest filtering, followed by ESG-Leaders, ESG-Enhanced and up to the strictest selection SRI “Socially Responsible Investing”. If you put the mother index and the filter next to each other, you get a good feeling for how many and especially which companies have made it into an ESG rating. The fewer stocks in the ESG index, the stricter the exclusion criteria.
What is it filtered for?
The softest filtering is the exclusion of specific industries: Alcohol, Tobacco, Guns, Pornography, and Armaments. And of course companies that have violated UN guidelines. This is the lowest common denominator in ESG. And after that, additional filtering is set. For example carbon, i.e. industry with high CO2 emissions. There are ESG funds that say we don’t exclude carbon, but only take the cleanest of the dirtiest. So from the oil companies, only those who have the highest proportion of renewable energies in the mix come in. As an investor, you can, so to speak, reward the exemplary companies within a dirty industry.
Complex to choose from, uncertain about returns. Is the ESG boom coming to an end?
No, I’d rather say it’s becoming normal. Even before the war in Ukraine, we could observe how fund providers add sustainability criteria to their classic funds – without the fund being given the ESG suffix as a result. This also applies to stock market indices themselves. When the Dax grew from 30 to 40 companies, very light sustainability criteria were introduced at the same time. The DAX was therefore not immediately renamed DAX-ESG. He remains the normal standard Dax.
Financial flow runs live streaming for private investors. Is ESG an issue there?
To be honest, rather little. I also believe that ESG is driven by societal pressures. The fund providers experience social pressure to offer such funds rather than a pull effect from investors who insist on ESG and would otherwise not invest. Those we know are investing in ESG because the supply is there. Otherwise they would also invest their money “normally”.
Is there evidence of this social pressure?
Absolutely. When Russia invaded Ukraine and there were signs of a rethink in European security policy, armaments stocks went through the roof. We’ve been inundated with requests for how to get into armor titles. During our research, we found that there is no defense ETF to buy in Germany. One of the big ETF houses quietly told us that they hadn’t added a military ETF to their portfolio for fear of negative publicity.
Is it worth getting into armor now?
You can buy shares in German armaments companies without any problems. But the information about the upgrade and the special fund are all on the market and priced in. Gun maker stocks are all up 30 percent or more. Such price jumps reflect expectations on the stock exchange for business development, after all, sales did not immediately increase by 30 percent. So, I would be more careful now.