As most advisors know, U.S. sustainable investing has grown dramatically, up 38% since 2016 in the U.S. to make up 26% of the $46.6 trillion in U.S. assets under management, according to the U.S. Sustainable Investment Foundation’s 2018 report on Sustainable, Responsible and Impact Investing Trends. Since 1995, when US SIF first started keeping tabs, socially responsible assets have had a 13.6% compounded annual growth rate.
George H. Walker, chairman and CEO of Neuberger Berman, set the tone of a discussion of the study findings, stating his own firm “believes these [environmental, social and governance] factors matter with return and risk, and makes better portfolio managers,” he said. Half of Neuberger portfolios will be ESG-linked by the end of 2018, he said, and that number is on track to hit 75% by the end of 2019.
Likewise, Meg Voorhes, director of research at US SIF, noted that with 26% of assets in ESG investments, “it’s not a niche area anymore.”
Primarily quantitative and behavioral, the study identified 365 money managers and 1,145 community investing institutions (i.e. banks and credit unions) that incorporate ESG criteria into investment analysis. Institutional investors manage the bulk of SRI assets, with $8.6 trillion managed professionally. Just $3 trillion is managed for individual or retail investors. In additions, US SIF gathered data from 496 institutional investors who managed $5.6 trillion.
According to the study, the top five ESG criteria for money managers were:
- Climate Change/Carbon ($3 trillion)
- Tobacco ($2.89 trillion)
- Conflict Risk (terrorist or regressive regimes, $2.26 trillion)
- Human Rights ($2.22 trillion)
- Transparency and Anti-Corruption ($2.22 trillion)
Of these, negative screen of tobacco has seen the largest increase since 2016, 432%, while governance-related transparency and corruption has grown by 206% in that time. Further, $1.9 trillion in assets had restrictions on weapons, a five-fold increase since 2016.
This importance of categories changes slightly when focusing on institutional investors’ key criteria, which were:
- Conflict risk ($2.97 trillion)
- Tobacco ($2.56 trillion)
- Climate Change ($2.24 trillion)
- Board Issues ($1.73 trillion)
- Executive pay ($1.69 trillion)
Also with institutional investors, negative screening for tobacco grew the most with a 121% increase since 2016.
Shareholder and Client Demand
Shareholder issues, especially for institutional investors, have grown by 39% on board members and 41% on executive pay since 2016. The greatest number of shareholder proposals filed on ESG issues regard:
- Proxy access
- Corporate political activity
- Climate change
- Labor & equal employment opportunity
- Executive pay
The largest group filing the most shareholder proposals were faith-based (33.8%) organizations, money managers (24.7%), foundations (13.2%), public (8.2%) and labor and other nonprofits (7.8% each).
In the study, client demand was the main reason for ESG investing. Eighty-two percent of the managers responding said so, while following mission came in at 82%, social benefit at 79% and returns at 76%.
The study had some other notable findings:
- Due to strong investor support, the share of S&P 500 companies with proxy access policies grew to 65% in 2017 from 1% in 2013,
- Several companies have agreed to report on, and correct, gender pay differentials,
- Money managers today also are more engaged: 88 money managers that have $9.1 trillion in AUM reported having dialogues with companies today about policies, up from 61 managers with $6.2 trillion in 2016.
Jonathan Bailey, managing director and head of ESG investing at Neuberger, noted that his firm has found strong engagement through bond holdings, saying that if they see something a company is doing that they don’t like, as a bond holder, they will step in with comments. He says they’ve had hundreds of such engagements.
Vehicles and Investors
Most money was invested in uncategorized money manager assets ($7.5 trillion), in which managers did not identify ESG vehicles invested in. Josh Humphreys, president and senior fellow with the Croatan Institute, said that showed “a huge opportunity for transparency.”
The number of assets in ESG incorporated mutual funds has jumped dramatically, to more than $2.5 trillion, up from just over $1.5 trillion in 2016. Further, there are more than 600 funds, from just a handful in 2010. Only $7 billion is in ESG-related ETFs.
The types of institutional investors incorporating ESG from 2010 to 2018 are largely public companies, followed by insurance companies. Next are educational firms. A smaller share of the pie includes faith-based organizations, foundations and other nonprofits.
Alternative funds, specifically private equity and venture capital funds, are investing more in ESG, according to the study, in which close to 400 funds now have ESG investments of close to $300 billion. REIT investments also grew dramatically in the ESG area, with about $200 billion invested.
Bailey said that the question isn’t whether to engage in ESG investing, but how to do so. He did note that companies can help investors by volunteering better financial information on ESG activity.
“Other regulators around the world are moving toward making it a requirement, especially in Europe,” he said. “Global companies should do the right thing and volunteer the information; we think it’s in their best interest. But if it’s not happening, perhaps the [Securities and Exchange Commission] should consider [stepping in].”