Sustainable investments one-third of U.S. assets

Sustainable investing assets now represent one-third of the $51.4 trillion professionally managed assets in the U.S., according to the US SIF Foundation's biennial trends report.

The Report on U.S. Sustainable and Impact Investing Trends, released Nov. 16, covers U.S. money managers and institutional asset owners using sustainable investment strategies, and looks at the ESG factors used to manage portfolios. US SIF considers incorporation of environmental, social and governance criteria in investment analysis and portfolio selection, and filing shareholder resolutions on those issues as the two main strategies for sustainable investing.

Of the $17.1 trillion in sustainable investing assets at the start of 2020, $2 trillion was involved in filing or co-filing shareholder resolutions on ESG issues at publicly traded companies from the start of 2018 to the end of 2019.

The 2020 levels represent a 42% growth spurt in the past two years. Money managers told US SIF that client demand was the top motivation, while most institutional investors said they were motivated by mission and social benefit.

Environmental concern was the fastest-growing category over the past two years, up 57% over the previous two-year period.

Among specific issues, executive pay had the greatest growth, up 122% since 2018. By assets, the largest amount, $2.73 trillion, involved conflict risk from terrorist or repressive regimes.

The report includes 530 institutional asset owners with $6.2 trillion in ESG assets, representing roughly half of the $12 trillion that money managers identified as institutional assets. Public funds represented the largest share, with 53% or $3.4 trillion, followed by insurance companies at 38%, and single- digit percentages for educational investors, foundations and others.

The $3.4 trillion share for public funds was a 10% increase over the previous two years. For those public investors, restricting investments in companies doing business with conflict-risk countries remains the top ESG factor affecting $2.49 trillion in assets. The other top issues were labor issues, up 40% since 2018; board issues, up 12%; tobacco, up 29%; and climate change/carbon, up 38%.

Climate change and carbon emissions were the top environmental concern, affecting $2.6 trillion in ESG assets. Other topics gaining importance were sustainable natural resources and agriculture, labor and social issues, and corporate governance criteria such as board issues, anti-corruption and executive pay.

For asset managers, climate change was still the most important ESG issue, with $4.2 trillion in assets involved, a 39% increase from the 2018 report.

The events of 2020 will highlight the need for more sustainable investing as policymakers address multiple issues including the COVID-19 crisis, racial injustice, economic inequality and climate change, said Lisa Woll, CEO of US SIF and the US SIF Foundation in Washington.

The organization is calling for the incoming Biden administration to create a White House Office of Sustainable Finance and Business that would accelerate a shift to a multi-stakeholder model. Other recommendations include installing leaders at the Securities and Exchange Commission and Department of Labor with expertise in sustainable investing, and having the SEC mandate ESG disclosure by public companies.

In separate research, Willis Towers Watson PLC's Thinking Ahead Institute found that the world's 100 largest asset owners are more prominently integrating ESG and being more active owners targeting concrete impact.

WTW's Asset Owner 100 list represents more than $20 trillion in assets as of the end of 2019, with 60% from pension funds, 32% sovereign wealth funds and 7% a combination of outsourced chief investment officers and master trusts. The $20 trillion represents a 6% increase from the prior year and more than one-third of all asset owner capital worldwide.

ESG strategies continue to evolve among the largest asset owners, WTW said, with new elements like factoring in member views, new investment benchmarks, impact reporting, reducing carbon emissions from portfolio holdings and investing in climate transition strategies that align with the Paris Agreement. According to Thinking Ahead Institute co-founder Roger Urwin, some of the larger asset owners on the list are also pursuing universal owner strategies that help protect the financial system and address other systemic risks like climate change without sacrificing risk-adjusted returns.

"This is consistent with a new era of ESG — which we call ESG 3.0 — that is fundamentally different from previous versions in that it includes real-world impacts on the environment and society while delivering better outcomes for beneficiaries," Mr. Urwin said.