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June 30, 2016 at 01:51 PM
Investors’ interest in SRI and ESG investing is such that companies and policy makers have been forced to address environmental, social and governance challenges, according to a report released in June by the The Forum for Sustainable and Responsible Investment, known as the US SIF Foundation.
Between 2012 and 2014, assets in socially responsible investments increased 76% to over $6.5 trillion, according to the report. US SIF found that in 2014, there were 925 investment funds and 214 separate account strategies that incorporated ESG criteria into their investment management.
Impact investing’s effects have spread from investment companies and advisors who create products and strategies to meet these investors’ objectives, to the actual management of companies, community development and public policy.
1. Investors’ Impact on the Industry
The report noted that as interest and assets in impact investments have grown, even investment companies that aren’t explicitly ESG firms incorporate ESG criteria in their analyses. Managers have applied ESG criteria across investment vehicles, market caps, active and passive styles, and value and growth strategies.
Since the Domini 400 Social Index was launched in May 1990, there has been a “dramatic expansion” of indexes and hundreds of sub-indexes, according to the report, including those from investment and research firms like Calvert Investments, Pax World Management and Sustainalytics, financial services firms like S&P Dow Jones, FTSE, MSCI, STOXX and Thomson Reuters, and global stock exchanges, including NASDAQ OMX, NYSE Euronext, Deutsche Boerse and the Johannesburg Stock Exchange.
The report noted that SRI indexes have comparable returns to traditional indexes. The MSCI KLD 400 Social Index (formerly the Domini index) returned an average 11.51% over the last five years, compared to the MSCI USA IMI’s 11.2%.
Specialized stock exchanges have also been created to serve impact investors, according to the report.
Alternative investments like private equity, real estate and hedge funds are adopting ESG criteria, the report found. Assets in the 212 private equity and venture capital funds that consider ESG factors reached $135 billion in 2014. Real estate is a natural target for SRI investors, according to the report, because “real estate investment entails tangible social and environmental impacts that investors can measure, and those impacts are material to long-term performance and risk assessment.”
Green bonds grew from $11 billion in 2013 to $36.6 billion the following year and almost $42 billion in 2015, the report found. The bulk of those proceeds focus on renewable energy, followed by energy efficiency, low carbon transport and sustainable water.
Morningstar and Sustainalytics started rating ESG mutual funds and ETFs in March, the same month MSCI announced it was launching MSCI ESG Fund Metrics.
Family offices are a new source of interest in impact investing, the report found. “Although publicly available data on family offices is limited, anecdotal evidence suggests that they are making more frequent inquiries to family office membership associations, financial advisors and consultants about adopting sustainable investment strategies,” the authors wrote.
Impact investments in retirement plans are still relatively limited, despite the Department of Labor’s release last year of an interpretive bulletin retracting its earlier charge that fiduciaries use economically targeted investments rarely. Social(k), which provides ESG investments for retirement plans, estimated that between 15% and 20% of 401(k) plans offered socially responsible investments in their lineups in 2014, US SIF reported.
2. Investors’ Impact on Companies
There are several ways impact investors drive change at publicly traded companies, US SIF found, including filing shareholder resolutions, communicating with executives and voting proxies.
These actions create a “ripple effect,” the report found, where “investors urge a few companies to take action on an issue, and other companies take note and adopt more sustainable policies to avoid becoming the targets of similar shareholder action, or being conspicuous for not having industry-leading policies.”
Proxy voting and shareholder resolutions are the primary ways investors affect change, according to the report, and investors file about 50% more shareholder proposals today than they did 10 years ago, including over 400 last year. Although support for individual proposals rarely tops 50% of shareholders, the report found that it’s “no longer uncommon for such proposals to receive the support of 30 to 40% of the shares voted.”
