More than 11 percent of investments under U.S. professional management were selected for companies’ financial performance and their social and environmental responsibility in 2012. That’s $3.74 trillion of the $33.3 trillion in investments scanned for environmental, social and governance criteria (known as ESG), according to a November report by the U.S. SIF Foundation.
Individuals and institutions are increasingly on the lookout for investment strategies that help them achieve environmental and social goals.
Call it what you like — sustainable investing, responsible investing, socially responsible investing, impact investing, green investing or just ESG — this practice is bringing new approaches into the traditional investment industry. The field has expanded tremendously since trail-blazing funds, such as the Dreyfus Third Century Fund and the Pax World Fund were launched in the early 1970s. Today, sustainable investors might be concerned with climate change, alternative energy, human rights, diversity, community investing or other issues. We have seen a blossoming of specialized advisors and consultants and new investment products across all asset classes.
Many studies have shown that sustainable investing does not mean additional risk or compromised returns. To cite just one paper, Deutsche Bank last year reviewed 100 academic studies of socially responsible investing and found that companies with high ESG ratings also have a lower cost of capital for both debt and equity (pdf). It also found that funds dedicated fully to sustainable investment fared as well as conventional funds.
Major investment management firms recognize that current and potential clients have a growing interest in sustainable practices. Nearly 1,200 asset owners, investment managers and professional service partners have signed the United Nations-backed Principles for Responsible Investment and are starting to disclose their ESG performance. Eighty-two U.S. money managers with $4.9 trillion in assets ask portfolio companies about ESG issues. Just 54 managers, with $3.8 trillion in assets, reported doing so two years earlier, according to the U.S. SIF Foundation.
Some small and family foundations have already rethought their endowment investments or stepped up shareholder engagement with portfolio companies in light of their missions. They include the Needmor Fund, Jessie Smith Noyes Foundation and the Wallace Global Fund. Some larger foundations, such as the W.K. Kellogg Foundation, are also committed to investing in alignment with their mission.
Sustainable investment is growing because investors and other stakeholders recognize its ability to deliver returns and influence corporate behavior. Investors have persuaded publicly held companies to disclose their risk from climate change, adopt sustainable forestry practices, check runaway executive pay and address labor and human rights conditions in their supply chains. They have encouraged investment strategies that promote economic development and expand financial services in poor communities.
Many consumers already think about the sustainability of the products they buy, their commutes and what they eat. It’s natural to extend that logic to their investment portfolios.
The practice may be less intuitive but is no less important for institutional investors. Their decisions can help advance a more sustainable and equitable economy.