The August declaration by the Business Roundtable, a group that includes many of the largest corporations in the United States, in stating that companies need to be more responsible to all stakeholders — rather than just shareholders — was a turning point in the move toward socially responsible investing. Institutions publicly declared the need to follow these principles to make them better stewards.
Indeed, environmental, social and governance focused ETFs and open-end funds (also including sustainable and impact investments) received $17.7 billion in net flows in 2019 through November, according to Morningstar Direct. That’s triple the total in 2018, according to Jon Hale, Morningstar’s head of sustainability research.
And performance is keeping up and surpassing regular returns. Writes Hale in his blog, “Among large-cap blend funds, the returns of nearly half (48%) of sustainable funds are ahead of the S&P 500 for the year to date, compared with only 22% of large-blend funds overall.”
The consensus is these types of funds will grow — already there are an estimated 500 — but the Securities and Exchange Commission has sounded an alarm. Not only did Commissioner Hester Peirce rise up against proxy voting firms, which the commission is now debating while awaiting public comment, it recently sent an unknown number of letters to so-called impact funds, according to The Wall Street Journal, asking for details about the strategies managers are using.
Double-checking if companies really are fulfilling their stated purpose may be standard procedure for the SEC when dealing with a new sectors or products, but the proxy voting issue has become a hot point and no doubt will come to a head next year.
Says Hale, “Over the years, shareholder resolutions have helped put ESG issues front and center on many companies’ radar, helping them attend to issues before they suffer the financial consequences of ignoring them.” However, he adds, the SEC is now trying to limit these activities. In fact, the SEC voted 3-2 to “raise the thresholds for shareholders to propose resolutions at annual company meetings and to increase the thresholds for resubmitting such resolutions in subsequent years.”
Further, the regulator is taking aim at the influence of proxy advisors. Amy O’Brien, Nuveen’s global head of responsible investing, told ThinkAdvisor that her company uses these firms’ objective research on issues as well as the execution of voting. She adds that Nuveen owns stock in 14,000 companies through its funds, thus expedition is needed.
“It’s really the [recommendation services] that will have the most focus on for the coming year and the rulemaking process,” she said. But that all comes with a maturing market. “[We think] that there will be continued growth with all things under the broader responsible investing tent. But with growth comes more scrutiny,” she acknowledges.
Yet O’Brien sees greater clarity and certainty for an industry that has an issue with its word taxonomy. ESG, SI and impact investing are all variations on the same theme, but there are differences, which organizations such as the [International Organization for Standardization] is working on defining.