A quantum leap in sustainable and responsible investing

MK report coverThe recently released biennial Report on US Sustainable, Responsible and Impact Investing Trends 2014 by the US SIF Foundation indicates that sustainable, responsible, and impact investing (SRI) assets have expanded 76 percent in two years from $3.74 trillion at the start of 2012 to $6.57 trillion at the start of 2014. This is the largest two-year increase in the amount of SRI investments in the Trends Report’s 20-year history. At this new level, investment strategies that integrate some form of environmental, social, and governance (ESG) criteria now account for more than one out of every six professionally managed investment dollars in the United States.

“The findings released today clearly demonstrate that investment decisions using sustainable, responsible, and impact investing strategies are on the rise,” said Lisa Woll, CEO of US SIF and the US SIF Foundation. “Sustainable investment strategies are being applied across asset classes to promote corporate social responsibility, build long-term value for companies and their stakeholders, and foster businesses that will yield community and environmental benefits.”

Note: See this recent commentary by NI’s Andy Loving, offering a more cautionary take on this recent growth in ESG investing.

According to the 480 institutional investors, 308 money managers and 880 community investment institutions participating in the research survey, the top reason for offering ESG products remains client demand, followed closely by interest in fulfilling a particular mission, improving returns, and effectively managing risk.

The two largest factors behind the growth of this segment of the investment industry are the addition of new investment vehicles and a continuing increase in size of existing products. In the past two years, the assets managed by investment firms considering ESG issues tripled in size from $1.4 trillion to $4.8 trillion. The largest group of asset owners responsible for this increase includes public pension funds, foundations, educational endowments, and religious institutions, which collectively hold $4.04 trillion in ESG assets, an increase of 77 percent since 2012.

The number of private equity and other alternative investment funds considering ESG factors also nearly doubled in the past two years while adding 35 new funds. This segment of the industry grew from 301 funds with $132 billion in assets to 336 funds with $224 billion in assets in 2014.

Leading Investor ESG Priorities

Climate change remains the most significant environmental factor in terms of assets, affecting $828 billion. Fossil fuel divestment policies, tracked for the first time in 2014, now affect tens of billions of dollars in assets.

Following the December 2012 elementary school shooting in Newtown, Connecticut, policies restricting investments in weapons manufacturers have spread.  Since 2012, consideration of these criteria by money managers has grown nearly four-fold in asset-weighted terms to affect $588 billion. Among institutional asset owners, concerns over weapons now apply to $355 billion in assets, a nearly five-fold increase.

Sudan remains the leading social issue for institutional investors in terms of the assets affected, with restrictions on investing in companies doing business there affecting $2.7 trillion in assets.

As for shareholder resolutions filed with companies, $1.72 trillion held by 202 institutional investors and money managers was leveraged in shareholder resolutions filed on ESG issues in the past two years. The largest jump in activity was in the realm of climate change risk, as 72 measures addressing concerns about climate risk were filed this year, more than double the number in 2012. A significant number of commitments were also made by companies whose shareholders had introduced calls to disclose and reduce their greenhouse gas emissions.

In the policy arena, investors have given strong support to a petition urging the US Securities and Exchange Commission (SEC) to require companies to disclose their political spending. The SEC has received more than 1 million comments on the proposal—a record in SEC rulemaking history.

The Trends Report is authored by US SIF Foundation, a 501c3 organization that undertakes educational, research, and programmatic activities to advance the mission of US SIF: The Forum for Sustainable and Responsible Investment, the US membership association for professionals, firms, institutions, and organizations engaged in sustainable, responsible, and impact investing.  This year’s report, conducted with research support from Croatan Institute, sent a confidential, personalized survey link to approximately 1,500 investment management firms and institutional asset owners identified in previous surveys as implementing sustainable investment strategies or believed to be new entrants to SRI investment. The research team also collected additional data from public and third-party sources. The results spotlight a rapidly increasing demand for investment options that offer social and environmental returns along with solid financial performance.

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Michael Kramer

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