Sustainability Matters

The Continued Growth of Sustainable Investing

Jon Hale, Ph.D., CFA

With $12 trillion now invested in the United States, sustainable investing is not just a trend, it's becoming part of the fabric of investing. That's my take after reading the Report on U.S. Sustainable, Responsible and Impact Investing Trends 2018, just released by the US SIF Foundation. At the beginning of the year, according to the report, investors in the U.S. had nearly $12 trillion in sustainable, responsible, and impact investments. These investments grew at a 38% compound annualized rate between 2016 and 2018, more than twice the rate of U.S. investments overall. About one in every four dollars of invested assets in the U.S. are now invested this way.

Exhibit 1: U.S. Sustainable Investments Swell to $12 Trillion 

And a lot more assets appear to be on the way as more institutional asset owners and money managers recognize that fiduciary responsibility in the 21st century includes a full consideration of the environmental, social, and governance risks and opportunities that can affect near-term and long-term investment performance. Many of these investors are also accepting the notion that they have a broader responsibility to consider the systemic social, economic, and environmental impacts of their investments.

Individual investors are starting to realize that they can make a difference with their money while also generating the returns they need to meet their financial goals. A 2017 Morgan Stanley survey found that 75% of respondents were interested in sustainable investing. Women and millennials expressed even stronger support. They now can choose from nearly 300 mutual funds and ETFs that explicitly incorporate ESG into their investment processes. BlackRock, the world's largest asset manager rolled out a suite of iShares Sustainable Core ETFs in October. Vanguard launched two ESG exchange-traded funds in September. Many more funds have 5-globe Morningstar Sustainability Ratings based on the ESG profiles of their portfolio holdings.

Why the move to sustainable investing? For one thing, sustainability issues are becoming more consequential for companies, and the firms that manage these issues effectively are more likely to be successful over the long run. 

Globalization forces companies to oversee supply chains in a responsible way and to operate in areas with scarce natural resources, which must be managed responsibly and efficiently. The intense competition for the best talent across many industries means companies must treat their workers better, not only with higher pay, but also in terms of workplace safety; having effective nondiscrimination, diversity, and family-leave policies; and the need to develop and maintain a positive corporate culture and sense of purpose.

Global warming requires attention to reducing carbon emissions in both operations and product usage, as well as to evaluating the range of possible physical impacts on a company's markets and customers, the locations of its offices and factories, and its use of natural resources. Companies face growing consumer demand for sustainable products and processes. Between this demand and operational efficiencies, more companies are recognizing that sustainable products and services can be profitable.

As sustainability issues become key components of business success, more investors are scrutinizing corporate sustainability performance by considering ESG factors. But there is something more to sustainable investing than only using ESG factors to find companies that make good long-term investments.

Sustainable investing provides a way for investors to tilt their investments toward companies that are doing the right things for society and the planet: lowering their carbon footprint, acting as better stewards of natural resources, treating their workers well, protecting their customers' privacy, making safe and useful products, respecting the communities in which they operate, and governing themselves ethically.

Of course, companies held in sustainable portfolios are not perfect, and in fact many of them can also be found in conventional portfolios. But most sustainable investors also engage directly with the companies they own about ESG issues that may be material to a firm's bottom line. They are willing to sponsor or co-sponsor shareholder proposals on ESG issues and to vote their proxies in favor of them at annual meetings. According to the US SIF Foundation's report, more than 2,500 shareholder proposals were filed from 2016 through 2018 on issues ranging from climate-risk disclosure and board diversity to corporate lobbying. More than 1,000 of these proposals were withdrawn prior to a shareholder vote, an indicator that direct dialogue between companies and sustainable shareholders was productive. Of those voted on, shareholder support has grown over time: Eighteen environmental and social proposals received majority votes from 2016-18 compared with only three from 2012-15.

In these ways, sustainable investors are encouraging companies to do better. The size of the sustainable investor base for many firms is growing. This can further encourage a company's sustainability efforts by giving management a wider berth to take a longer-term perspective that considers a full range of stakeholders.

By helping make global capitalism work for more people, sustainable investing gives the act of investing a sense of purpose beyond financial returns.