Sustainable assets climb 76 percent in two years

The practice of sustainable investing has evolved to encompass an array of strategies since its early days of negative screening by faith-based institutions. And, as the recently published Report on US Sustainable, Responsible and Impact Investing Trends 2014 reveals, assets devoted to the practice rapidly are increasing: the $6.57 trillion in sustainable assets "represent nearly 18 percent of the $36.8 trillion in total assets under management," according to the report; such assets have increased by 76 percent since 2012.

The Trends Report, published on a biennial basis by US SIF: The Forum for Sustainable and Responsible Investment, divides the practice of sustainable investing into two broad categories: the incorporation of environmental, social and corporate governance considerations into investment decision making; and the practice of shareowner engagement.

Shareholders wield power

Shareowner action, which US SIF describes as emblematic of the industry's evolution from avoidance to active ownership, accounts for about $1.7 trillion of the funds invested according to sustainable guidelines.

"In asset-weighted terms," the report stated, "public funds dominate this arena, accounting for $1.26 trillion of the assets but just 15 of the filing institutions." On the other hand, readers of SocialFunds.com should not be surprised to learn that faith-based institutions — most of which are members of the Interfaith Center on Corporate Responsibility — are by far the most numerous practitioners of shareowner action.

ESG spurs evolution

But it is in the area of ESG incorporation, which accounts for the lion's share of sustainable assets, that the evolution of sustainable investing can be described. In one of several highly useful narratives included in the report, US SIF notes the formation of the first modern sustainable mutual funds in the 1970s, which “were the first funds both to avoid tobacco, alcohol, nuclear power and military defense contractors and to consider labor and employment issues.” In the 1980s, the anti-apartheid movement in South Africa galvanized both divestment strategies and corporate engagement.

Since then, ESG incorporation has developed to include more than negative screening and divestment. Climate change and fossil fuel dependence, an increased scrutiny of the supply chains of multinational corporations and a growing number of opportunities for investment in renewable energy and other clean energy investments have enabled many sustainable investors to be more proactive in helping to shape a global economy that aspires to be more just and environmentally responsible.

In addition to negative screening, ESG incorporation strategies include the inclusion of risks and opportunities in financial analysis, investment in companies with superior ESG performance when compared to industry peers, impact investing, and sustainability-themed investment, in which assets are allocated to superior ESG performers across a broad spectrum of industry sectors.

While it remains a comparatively small percentage of sustainable assets, community investment is a critically important response to the consequences of increasing wealth inequality, and the Trends Report devotes a subsection to the practice. While the rate of increase has slowed since the dramatic gains recorded in 2012, community development financial institutions (CDFIs) continue to provide financial services and technical assistance to businesses and residents in communities underserved by commercial banks.

A look down the path ahead

Overall, one finds little with which to quibble in a well-written and informative report. It is only when one studies the breakdown of how assets are allocated by sustainable investors that where they fall short in the midst of a global environmental crisis becomes more clear. Among both money managers and institutional investors, negative screening — primarily in the forms of avoiding investment in tobacco products and adhering to regulatory restrictions on investing in companies doing business in Sudan — continues to predominate, although “climate change remains the most significant environmental factor in terms of assets.” With fossil fuel divestment a noteworthy development in 2014 (after the numbers in the report had been collated), addressing climate change is likely to grow.

As Cary Krosinsky, executive director of the Network for Sustainable Financial Markets, wrote in his foreword to "Evolutions in Sustainable Investment: Strategies, Funds and Thought Leadership," "Take a purely values-based approach, and you risk missing the very same practical opportunities in eco-efficiency and innovation, where the sustainability we require will come from." Also according to Krosinsky, the 2012 Trends Report reveals "at most $100B in managed portfolios applying ESG factors actively."

Whether it is because of the financial risks associated with investment in relatively new companies engaged in clean technologies, or because of lingering concerns over a narrow concept of fiduciary duty outlined in the Employee Retirement Investment Security Act (ERISA) in 2008, the movement of sustainable assets into the clean tech space has not yet grown to offer a clear sense of the low-carbon economy that most if not all sustainable investors agree is a critical necessity.

“Investors who divest from fossil fuels likely will consider opportunities for investment in renewable energy and energy efficiency,” US SIF has stated. If the fossil fuel divestment movement continues its momentum, and a significant portion of those assets are reinvested in companies whose products and services contribute to a low-carbon economy, then the 2016 Trends Report should make for compelling reading.