Future Returns: Sustainable Investing Poised To Gain Assets

Assets in sustainable strategies are rising at a fast clip globally, with US$35.3 trillion invested as of 2020, according to a report out this week from the Global Sustainable Investment Alliance or GSIA, an international collaboration of membership-based sustainable investment organisations.

With several changes afoot in regions across the world, these figures are likely to climb further by the time the next report is released in two years. In the U.S.—where 48% of sustainable investing assets resided as of the beginning of 2020, according to the report—potential regulatory and legislative changes are expected to spur further interest in sustainable strategies.

The report, titled the Global Sustainable Investment Review (GSIR), is based on data provided through Dec. 31, 2019, with the exception of Japan, where the data is collected through March 31, 2020.

In part, that’s because these changes will lead to a rise in investments by individual investors in sustainable investing—which include a range of strategies emphasizing environmental, social, and governance, or ESG, matters. Currently about 25% of all investments in sustainable strategies are by “non-institutional” investors, a figure that held steady between the last two reports.

One reason assets haven’t expanded as fast in the retail market is that growth typically comes from retirement funds, where a majority of retail assets are invested, says Lisa Woll, CEO of US SIF: The Forum for Sustainable and Responsible Investment, a membership organization focused on shifting investment practices to sustainability.

And, Woll points out, the U.S.’s largest retirement plan—the US$760 billion Federal Thrift Savings Plan—doesn’t offer any ESG options to its 6.2 million members, Woll says.

Beginning next summer, however, members will be offered the option of investing in ESG mutual funds in response to a May executive order on climate-related financial risk from President Joe Biden.

Among several items, the order asks the secretary of labour to assess “how the Federal Retirement Thrift Investment Board has taken environmental, social, and governance factors, including climate-related financial risk, into account.”

“We’ve worked on this for a decade, to get them to implement that,” Woll says.

Penta recently spoke with Woll about trends in sustainable investing globally and in the U.S., much of which was detailed in the group’s own report on sustainable and impact investing trends in November.

Shifts in the U.S. Regulatory Landscape

Another drag on asset growth in retirement funds was the “anti-ESG agenda” of former President Donald Trump’s administration, Woll says. “Now, it’s a new era.”

The U.S. Department of Labor in March stated it would not enforce Trump-imposed rules limiting the ability of retirement-plan administrators to consider ESG factors in retirement options, and to engage in proxy voting on ESG-related issues, according to the report.

Also in March, the Securities and Exchange Commission took initial steps that could result in requirements by corporations to disclose climate-related risks to their operations in addition to a “potentially a broader set of ESG issues,” the report said.

More broadly, the Biden administration is addressing several ESG themes in addition to climate. One example is labour rights, the subject of the new White House Task Force on Worker Organizing and Empowerment.

The potential implications for ESG investing from the array of government actions taken so far, and those to be expected, haven’t fully been analysed yet, and could be significant. The climate-change directive, for instance, “affects so many different agencies in different ways,” Woll says.

And, she notes, a more recent executive order on competitiveness includes language about treating employees better, which is a key governance concern for investors.

It’s about “creating better capitalism and better companies,” Woll says. “There are all kinds of interesting focal points, including diversity, equity, and inclusions—big policy priorities for the administration and our members.”

The Rise of ESG Integration

By far the most popular sustainable investing strategy—representing US$25.2 trillion in assets globally—is “ESG integration,” an approach where ESG factors are explicitly included in financial analysis, according to the GSIA.

That’s a major switch from 2018, when negative screening was the most popular global strategy with nearly US$20 trillion in assets compared to US$15 trillion by 2020. Negative or exclusionary screening—which remains highly popular in Europe—removes categories of investments such as companies engaged in making weapons or tobacco, or those involved in human rights abuses, versus seeking out companies engaged in best ESG practices.

One reason for the popularity of this approach is that any investment manager who wants to get business increasingly needs to be a signatory to the Principles of Responsible Investment (PRI), a U.N.-sponsored network of investors, Woll says. “ESG integration was very much the preferred strategy taken up by those signatories.”

In the U.S. Woll is concerned, however, that many companies offering ESG integration strategies don’t clearly articulate their criteria, making it difficult for investors to know what kind of impact their investments are having.

“We have to have more transparency around this,” she says.

The Global Picture

While the GSIR report provides a good snapshot of sustainable investment trends in five major markets (the U.S., Canada, Japan, Europe, and Australia/New Zealand), it also reveals a sector that’s in flux as changing frameworks, regulations, and definitions make it difficult to precisely track global trends.

For instance, in Europe, assets invested in sustainable strategies fell 13% to US$12 trillion from US$14 trillion in 2018. But that decline simply reflects changes in regulatory definitions that no longer include some products or strategies.

In Australia and New Zealand, assets grew to US$906 billion from US$734 billion, but the growth was at a slower pace because of new industry standards for sustainable investment.

Given different strategies and different regulatory environments, the countries from major markets involved in the report are recognizing that field-builder institutions such as US SIF or the European Sustainable Investment Forum need to be resources for best practices, Woll says.

Reprinted by permission of Penta. Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: July 20, 2021