Asset managers seeking new levels of diversification and
risk awareness are wholeheartedly embracing investing programs designed with environmental, social and governance (ESG) themes in mind, according to a new report from
U.S. SIF, the research and advocacy organization supporting ESG and sustainable
and responsible investing (SRI).
According to U.S. SIF researchers, ESG/SRI investing assets have expanded to $8.72
trillion in the United States, up an impressive 33% from $6.57 trillion in 2014.
Important to note, much of the interest and growth is driven by asset managers themselves, rather than their institutional and retail
clients. Investment firms, looking to better map risk exposure and reduce asset
correlations, now consider ESG criteria across $8.10 trillion in assets, up a
whopping 69% from $4.8 trillion in 2014.
Some investors, for
example, are thinking deeply about how the social interconnectivity of the
world has dramatically impacted market correlations and the competitive
landscape in which all for-profit enterprises operate. Other investors, it
could be said, are actually hedging the possibility of negative environmental
impacts from climate change within their portfolios, positioning themselves to
be ready to take advantage of new solutions that will undoubtedly be needed in
a climate-stressed future. At a high level, the top two issues considered both
by money managers and by their institutional investor clients are “conflict
risk” and “climate change,” the researchers observe.
“The trend of robust growth in sustainable and impact investing
is continuing as investment managers apply ESG criteria across broader portions
of their portfolios, often in response to client demand,” adds Lisa Woll, U.S.
SIF Foundation CEO. “Asset managers, institutional investors, advisers and
individuals are moving toward sustainable and impact investing to advance
critical social, environmental and governance issues in addition to seeking long-term
financial returns.”
NEXT: Robust embrace
of ESG themes
Looking closer at
the growing pool of investments that consider ESG/SRI factors during portfolio
management, U.S. SIF measures $8.10 trillion in U.S.-domiciled ESG/SRI assets,
as of the outset of 2016. The investments are held by 477 institutional
investors, 300 money managers and 1,043 community investing financial
institutions to which various ESG criteria are applied in investment analysis
and portfolio selection.
There is also roughly $2.56 trillion in U.S.-domiciled portfolios,
held by 225 institutional investors or money managers, that filed or co-filed
shareholder resolutions on ESG issues from 2014 through 2016.
“These two segments of assets, after eliminating double
counting for assets involved in both strategies and for assets managed by money
managers on behalf of institutional investors, yield the overall total of $8.72
trillion, a 33% increase over the $6.57 trillion that the U.S. SIF Foundation
identified in sustainable investing strategies at the outset of 2014,” the
report explains.
Contextualizing the data,
U.S. SIF says the significant growth in ESG assets “reflects demand from
individual and institutional clients, growing market penetration of SRI
products, the development of new products that incorporate ESG criteria and the
incorporation of ESG criteria by numerous large asset managers across wider
portions of their holdings.”
Indeed, the top reasons managers reported incorporating ESG
factors include client demand (85%), mission (83%), risk (81%), returns (80%),
social benefit (78%), fiduciary duty (64%) and regulatory compliance (22%).
NEXT: Market evolution
also encouraging for ESG
The report concludes the number of investment vehicles and
financial institutions incorporating ESG criteria will very likely continue to
grow.
Today ESG/SRI is already being implemented within mutual
funds, variable annuities, exchange-traded funds (ETFs), closed-end funds,
hedge funds, VC/private equity, property/REIT, other pooled investment
vehicles, and community investing institutions.
“The leading ESG criteria that institutional investors
consider are restrictions on investing in companies doing business in regions
with conflict risk—particularly in countries with repressive regimes or
sponsoring terrorism—and consideration of climate change and carbon emissions,”
U.S. SIF finds. “While the number of institutions and money managers actively
involved in filing shareholder resolutions has remained relatively stable over
the past four years, the proportion of shareholder proposals on social and
environmental issues that receive high levels of support has been on the rise.”
Further, according to the report, money managers and
institutional investors are pursuing engagement strategies on ESG issues in
addition to filing shareholder resolutions at publicly traded companies.