Sustainable and Impact Investing in U.S. Surges by 33%: Report

Investors demand consideration of environmental, social and governance factors

Investor demand for sustainable, responsible and impact investing has grown by 33% since 2014, according to the Forum for Sustainable and Responsible Investment (US SIF) Foundation’s 2016 report.

The study found that investors now consider environmental, social and governance across $8.7 trillion of assets professionally managed in the U.S., about a fifth of total assets under management tracked by Cerulli Associates.

Lisa Woll, chief executive of US SIF and its foundation, said money managers and institutional investors in 2016 were scrutinizing concerns, such as climate change, weapons production, human rights, and corporate political spending and lobbying, across a broader span of assets than in 2014.

“A diverse group of investors is seeking to achieve positive impacts through such strategies as corporate engagement or investing with an emphasis on community, sustainability or the advancement of women,” Wohl said in the study’s introduction.

The research identified 477 institutional investors, 300 money managers and 1,043 community investment institutions with $8.1 trillion in U.S.-domiciled assets at the beginning of 2016 that apply various ESG criteria in their investment analysis and portfolio selection.

In addition, $2.6 trillion in U.S.-domiciled assets were held by 225 institutional investors or money managers that filed or co-filed shareholder resolutions on ESG issues at publicly traded companies from 2014 through 2016.

The study arrived at the overall $8.7 trillion figure for SRI assets after eliminating double counting for assets involved in both strategies and for assets managed by money managers on behalf of institutional investors.

It said several factors account for growth in ESG assets, including 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.

In addition, during the past two years, numerous institutional investors and asset managers have disclosed how they are implementing the Principles for Responsible Investment.

From 2014 to 2016, the report said, 176 institutional investors — including public funds, religious investors, labor funds, foundations and endowments — and 49 investment management firms with total assets of $2.6 trillion filed or co-filed resolutions.

The number of institutions and managers actively involved in filing shareholder resolutions has remained relatively stable over the past four years, while the proportion of shareholder proposals on social and environmental issues that receive high levels of support has been rising.

Since 2013, approximately a third of these proposals received support from some 30% of the shares voted. From 2007 through 2009, only 17% of proposals cleared this threshold.

Money managers and institutional investors are pursuing engagement strategies on ESG issues in addition to filing shareholder resolutions at publicly traded companies. Fifty-seven institutional asset owners reported that they engaged in dialogue with companies on ESG issues, as did 61 asset managers.

SRI Drivers and Trends

In recent years, according to the report, a number of trends have shaped the evolution and growth of SRI within U.S. financial markets.

Eighty-five percent of money managers that responded to an information request about reasons for incorporating ESG cited client demand as a motivation.

At the same time, 114 money managers reported little to no detail for ESG assets worth $5.4 trillion, much of it identified through their PRI transparency reports.

Sixty-two percent of managers that responded to the survey said they used some combination of negative screening, positive screening and ESG integration within their funds. More than half reported using strategies of impact investing, and nearly half used sustainability-themed investing as a strategy.

ESG integration affected the largest pool of assets, $1.5 trillion.

Climate change remained the most significant overall environmental factor in terms of assets, affecting $1.4 trillion in money manager assets and $2.2 trillion in institutional investor assets, three times more than the amounts affected in 2014.

Moreover, shareholders concerned about climate risk filed 93 resolutions specifically on that subject in 2016, and negotiated several commitments from target companies to report on strategic planning around climate change or to reduce their greenhouse gas emissions.

In terms of specific ESG criteria, conflict risk analysis, including the exclusion of companies doing business in countries with repressive regimes or state sponsors of terrorism, affected $1.5 trillion of money manager assets and remained the top ESG factor institutions incorporate into their investments, affecting $2.8 trillion.

For the first time in 2016, SIF researchers tracked transparency and anti-corruption measures, finding that $725 billion of manager assets took this criterion into account, while institutional investors reported $528 billion.

Also for the first time, researchers tracked the emerging trend of gender lens investing, and identified some $132 billion in money manager assets and $397 billion in institutional investor assets affected.

The study found that community investing institution assets shot up 89% from 2014 to nearly $122 billion. This growth was led by a particularly large increase in the assets of community development credit unions, which more than doubled over two years.

Disclosure and management of corporate political spending and lobbying was the biggest single ESG concern raised by shareholders, which filed 377 proposals on this subject from 2014 through August 2016.

Many of the targets of these proposals were companies that support organizations that deny climate change science and lobby against regulations to curb greenhouse gas emissions.

As well, investors filed 350 proposals at U.S. companies from 2014 through 2016 to facilitate shareholders’ ability to nominate directors to corporate boards. As a result of the strong investor support for these “proxy access” proposals, the share of S&P 500 companies establishing proxy access measures over this period skyrocketed from 1% to 40%.

--- Check out Innovation, Quality Data Are Key to Impact Investing on ThinkAdvisor.

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