This is what lies behind Grünfin's promise of sustainable investment

The founders Karin Nemec and Triin Hertmann promise the customers of their investment platform a sustainable effect. This annoys consumer protectionists.

If you hear the companies Exxon Mobil, Nestle and Sony in the same sentence, you might have a hard time finding common ground. With the "iShares MSCI World ESG Screened UCITS ETF", however, it is possible. Because whether it's the oil company, the often-criticized food producer or the technology group, they all meet certain sustainability criteria. That's because they don't rely on coal-fired power and, according to the fund's assessments, are not associated with human rights abuses.

The iShares MSCI World ESG Screened UCITS ETF aims to reach investors who want to put their money into environmentally friendly and fair companies. It's all about sustainable investing - and that's where corporations criticized for pollution and electronics manufacturers criticized for relying on forced Uighur labor in supplier factories are rather unusual choices.

ESG labels are not enough for sustainable investments

The example shows: Anyone who really wants to invest sustainably cannot blindly rely on ESG labels, but must look very closely at a fund's strategy and at the companies in which it is invested. This requires a lot of time and also a certain degree of financial education. German banker Karin Nemec and Estonian manager Triin Hertmann want to help investors do just that. Grünfin, the name of their fintech, is intended to become "the best platform for sustainable investing in Europe," as co-founder Nemec says. But is it even that simple?

Grünfin has raised two million euros from investors in the two years since it was founded in Estonia. Now Nemec and Hertmann want to take off on the German market as well. The founders describe Grünfin's concept as a mixture of an analog and a digital automated asset manager, also known as a robo-advisor.

Grünfin advertises a portfolio with impact

In a questionnaire, customers first indicate which topics are particularly important to them when investing their money. They can choose between climate protection, equality and health. Depending on their risk tolerance and focus, Grünfin then puts together a portfolio of ETFs for the customer. A "portfolio with impact," Grünfin advertises accordingly on its website. But living up to this promise is difficult. Because the financial industry, investors and consumer advocates disagree about what is sustainable - and there is always the danger of falling into the greenwashing trap.

Karin Nemec and Triin Hertmann are also aware of this - and, according to their own statements, apply strict criteria when selecting ETFs. From thousands of ETFs analyzed by Grünfin's analysis team, eight ultimately remained, say the two founders. To be sure, many ETFs have received ESG ratings from rating agencies, they say. "But often those ratings are too lax," Nemec says.

"Rating agencies determine whether an investment product meets ESG criteria based on unverifiable data. They sell their ratings to fund companies and banks; unfortunately, these ratings are not independent or valid."

Niels Nauhauser, Consumer Advice Center Baden-Württemberg

But this does not completely rule out the possibility that money may still be flowing into companies that have a negative impact on society and the environment. For example, Niels Nauhauser, financial expert and head of department at Verbraucherzentrale Baden-Württemberg, complains that ESG ratings are awarded lightly. "Rating agencies determine whether an investment product meets ESG criteria based on data that cannot be verified. They sell their ratings to fund companies and banks; unfortunately, these ratings are not independent or valid," he says.

The main problem, according to Nauhauser, is that there is no standard definition of sustainable investments, nor is there a government institution that monitors whether sustainability promises are being kept. In addition to the information from the balance sheets, the rating is based on unverifiable self-disclosures by the companies to be rated. There is therefore no reliable data needed to assess how ecological the investment products really are, Nauhauser said.

Consumer advocates annoyed by Grünfin's promise

But Grünfin didn't select the eight ETFs currently under consideration for its portfolios based solely on ESG ratings. For example, the fintech focuses on ETFs that meet the criteria for Article 9 in the EU regulation on sustainability-related disclosure requirements in the financial services sector. To be classified under Article 9, funds must have a clear sustainability objective. "We also prefer ETFs from asset managers that specifically influence companies in board meetings to meet sustainability targets," Nemec says.

However, consumer advocate Nauhauser is also annoyed by impact advertising promises made by the start-up. It's misleading, he says, because there's no evidence of actual impact from buying shares on the stock market. The purchase of certain shares or ETFs would not directly lead to a company building a new wind turbine, for example - after all, the share had previously been bought from another market participant, Nauhauser explains. Actual impact could be achieved, for example, if investors provided capital to a new market participant, without which it would not be possible to build another wind turbine.

Grünfin founders Karin Nemec and Triin Hertmann see things differently. True, as an individual investor, one has only limited influence. "But in the community lies the power." If investors acted as a collective with billions or trillions in assets, then even large companies would have an open ear for their concerns. In addition, Grünfin has teamed up with Share Action, a non-profit investor association that acts as a community of interest in contacting companies and calling for action in areas such as climate protection.