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Sustainability labels: How they can help with investment decisions

Sustainability labels: How they can help with investment decisions
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The trend in sustainable investments continues to point upwards. According to the market report (available only in German) by the Forum Nachhaltige Geldanlage (engl.: Forum Sustainable Investment; FNG), more than one in three euros invested in Austria was already invested in a sustainable investment product in 2022.

Investors are therefore increasingly focusing on environmental, social and governance criteria when it comes to their investments. But how can investors even know which products and funds are truly sustainable?

One way of separating the wheat from the chaff is to use sustainability labels. In this article, we explain why these labels exist and how they can help investors make investment decisions.

Source: Marktbericht Nachhaltige Geldanlagen 2023; Note: Past performance is not a reliable indicator for future performance.

What are sustainability labels?

Sustainability labels and certifications are now available for all kinds of products – including financial investments such as investment funds. They are used to identify products that meet certain sustainability criteria.

The specific criteria that must be met in order to receive a label or certification are determined by the respective awarding or testing bodies themselves. There are therefore different standards, guidelines, criteria and processes depending on the label. For investors who want to invest their money sustainably, it therefore makes sense to take a close look at the various labels and their characteristics.

Why do we need sustainability labels?

Sustainability labels for investment funds offer consumers an overview and provide uniform standards. This makes it easier to compare many products and is intended to give investors a basis for comparison that is as transparent and well-founded as possible, which they can use as a guide. At the same time, it is important to note that not all labels are the same. As already mentioned, there are different procedures and approaches.

What labels are there for investment funds?

Not only are sustainable funds becoming increasingly popular, the number of labels and certifications for financial products has also increased in recent years. As an investor, it can be easy to lose track.

In this article, we focus on two of the most important and best-known sustainability labels for funds in German-speaking countries: the Austrian Ecolabel and the FNG label.

Austrian Ecolabel

The Austrian Ecolabel for sustainable financial products is a state-run, independent label of quality and is awarded by the Federal Ministry for Climate Action, Environment, Energy, Mobility, Innovation and Technology. It was and is one of the first international labels for sustainable funds and was launched in 2004.

The Association for Consumer Information (VKI) is responsible for drawing up and revising the Ecolabel guidelines and for the administration of interested parties and Ecolabel companies. Whether a financial product meets the requirements for the Ecolabel must be confirmed by a qualified testing body. This is selected from a pool of testers managed and provided by the VKI.

The products are checked according to ecological and ethical-social criteria. Exclusion criteria regulate which investments may not be made. These include, for example, fossil fuels, nuclear power, genetic engineering and armaments. On the other hand, there must be selection processes to identify companies, countries or projects that actually deliver positive environmental and social benefits. In addition, investors must be informed transparently about the socio-ecological concept of the sustainable financial product.

Read more about the criteria and the bearers of the Ecolabel here. Further information on the function of the Austrian Ecolabel can be found in this guest article.

FNG label

The FNG label has been awarded by the Forum Nachhaltige Geldanlage (engl.: Forum for Sustainable Investments; FNG) since 2015. The methodology of the label was developed in a three-year stakeholder process, in which Erste AM was also actively involved. The label is based on a minimum standard, which includes certain transparency criteria and the consideration of labor and human rights as well as environmental protection. The companies in which the respective fund invests must be explicitly analyzed for sustainability criteria. There are strict restrictions on investments in nuclear power, coal mining, weapons and armaments.

The sustainability investment style, the investment process and the sustainability criteria are analyzed and evaluated on the basis of over 100 criteria. If additional requirements defined in a tiered model (institutional credibility, dialog with companies in the form of engagement and voting, etc.) are also met, up to three stars can be added to the label. The review process must be repeated every year.

Overall responsibility for coordinating, awarding and marketing the label lies with the Qualitätssicherungsgesellschaft Nachhaltiger Geldanlagen mbH (QNG). The funds are analyzed and tested by the scientific association F.I.R.S.T. in conjunction with Advanced Impact Research GmbH (AIR) as a university spin-off. The review process is also monitored by an independent advisory committee. Its members include experts from the Austrian Society for Environment and Technology, the Impact Network GIIN and WWF Germany.

All further information on the label can be found on this guest blog post.

Tip: Which funds may bear the FNG label this year will be announced on November 23. From 3 p.m. you can find out here on our blog which Erste AM funds have been awarded the prestigious sustainability label.

Conclusion

Sustainability labels give investors the opportunity to compare financial products and their criteria and characteristics. On the one hand, this creates more transparency in the market for sustainable investments and, on the other hand, offers guidance for consumers.

The test criteria and standards according to which the respective labels are awarded are particularly decisive. As an investor, you should therefore find out exactly what the requirements of a label are before making an investment decision.

Sources:
Marktbericht Nachhaltige Geldanlagen 2023, Forum Nachhaltige Geldanlage
https://www.umweltzeichen.at/de/produkte/finanzprodukte
https://fng-siegel.org/

For a glossary of technical terms, please visit this link: Fund Glossary | Erste Asset Management

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Prognoses are no reliable indicator for future performance.

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