The growth in investment funds that claim to be sustainable is eye-catching — not just in their investment mandates, but also in their recent growth of assets under management.
According to the Global Sustainable Investment Alliance, a global club of sustainable investment organisations, environmental, social and governance (ESG) investing now accounts for more than $30-trillion of assets under management, with expectations of further growth to $50-trillion within the next two decades. To put that into perspective, the entire S&P 500, an index of the top 500 companies in the US by market capitalisation, is a little over $24-trillion.
If the figures don’t impress, then statements by leading financiers should alert one to the potential of this sector. As far back as 2018, BlackRock CEO Larry Fink told CNBC that “ESG represented the biggest net changes in [investor] demand in the US”. Sustainable investment is typically the integration of ESG considerations in investment decision-making. It includes impact investment, which seeks a definitive environmental or social return in addition to financial return, and socially responsible investment that screens out certain undesirables such as investments in tobacco or armaments.
Within this space some fundamental questions should be asked, such as how big will ESG get and what will it look like in a post-corona world? These are important, especially if you are a believer in the power of money being a positive force by directing capital flows towards sustainable solutions or, at the least, not doing harm.
A secondary question might allude to exactly what kind of positive impact we are looking for. Some ESG funds risk their integrity by including oil, gas and other fossil fuel companies in their portfolios. Blackrock’s iShares ESG MSCI USA ETF has holdings in Chevron, ExxonMobil, ConocoPhillips and Occidental Petroleum, to name a few.
According to MSCI’s ESG Research body, 87% of high net-worth millennials, aged 24-39, consider ESG track records in investment decision-making
Fossil Free SA, a non-governmental organisation campaigning for fossil fuel divestment, claims Old Mutual’s MSCI ESG World Index Feeder Fund is collectively 6.1% weighted towards companies owning fossil fuel reserves. Such investments run the danger of being ESG only in name, and investors then disregard or fail to understand the true meaning of sustainability.
Underlying all of this is the real question of whether ESG investing is here to stay and, if so, whether it will continue to grow in prominence. Considering the underlying trends, indications are that the answer is a resounding “yes”. The demographic and political make-up of future investors is prime. Institutional and retail investment products are responding to the changing age structure of high net-worth individual investors, trending towards the millennial generation who are seeking social and environmental impact in addition to financial return.
According to MSCI’s ESG Research body, 87% of high net-worth millennials, aged 24-39, consider ESG track records in investment decision-making, and 90% want to tailor their investments to their values. It is important to recognise that this demographic is now an active investor — no longer a future investor to be speculated about. A total 73% of millennials believe climate change is “personally important” to them. This is relevant from a political perspective. As this generation’s political influence increases, it will demand alignment with international climate solutions such as the Paris 2015 climate agreement, on which many ESG, and particularly climate, funds draw guidance.
Material investment impact is being sought. In 2019, BAM Alliance, a collection of 135 independent US wealth management advisers, stated that within the next five years 20% of fund managers will be allocating 21%-50% of their portfolios to ESG funds. They quoted a 2019 paper claiming that funds that carried the low-carbon designation label, a verifiable carbon ecolabel for mutual funds, enjoyed 3.1% higher inflows of investment capital than traditional funds. It seems time might be up on vague ESG investment principles.
Investor watchdogs
Sovereign wealth funds (SWFs) are also pursuing the sustainability mantra. A paper posted earlier in 2020 by the Harvard Law School Forum on Corporate Governance analysed 24 SWFs representing more than 80% of total SWF assets under management, in which half disclosed their ESG investment policies and indicated that the public equity portions of their portfolios were weighted in favour of companies with high ESG ratings. Many of these funds, such as the $1-trillion Norway Government Pension Fund, carry clout in the investment world.
The role of independent investor watchdogs should also be considered. There is a plethora of activist NGOs tracking and challenging investors’ and corporates’ ESG performances — an example being ShareAction, a London-based sustainable investment advocacy group that recently called out major European banks for poor response to climate change risks. Such groups are bringing environmental and social issues to the attention of asset owners and managers. Their increasing numbers indicate they aren’t going away soon.
It would therefore seem that time is on the side of the ESG investment movement. While unruly elements within seeking to piggyback on its original motives need to be weeded out, there is more than enough evidence to suggest that future investors will demand their investment strategies align not just with their values but also with what will be deemed non-negotiable from a sustainability perspective.
If they fail to push through their agenda, there will always be the civil society actors reminding us of our environmental and social limits and that capital can do both harm and good. Genuine sustainable investment seeks to do good, and investors are increasingly intrigued by this proposition.
• Hetherington is a sustainability consultant and is studying sustainable finance at Columbia University in New York City.
