The U.S. Sustainable Investment Forum (U.S. SIF) has published an extensive report on the state of environmentally and socially conscious investing by U.S. institutional asset owners, aptly titled “Report on U.S. Sustainable, Responsible and Impact Investing Trends 2018.”
In the retirement plan industry, sustainable investments are often described using the terminology of “ESG,” shorthand for environmental, social and governance investing. It is also common in the retirement industry to use the terminology “SRI,” short for socially responsible investing. This report breaks down both ESG and SRI usage.
According to the report, asset management firms and institutional investors are addressing a diverse set of ESG and SRI concerns across a broader span of assets than found in the previous report, published in 2016.
“Many of these money managers and institutions, concerned about racial and gender discrimination, gun violence and the federal government’s rollbacks of environmental protections, are using portfolio selection and share-owner engagement to address these important issues,” the report says.
According to U.S. SIF, the subject of ESG and SRI investing in the United States continues to expand at a healthy pace.
“The total U.S.-domiciled assets under management using SRI strategies grew from $8.7 trillion at the start of 2016 to $12.0 trillion at the start of 2018, an increase of 38%,” the report says. “This represents 26% of the $46.6 trillion in total U.S. assets under professional management. Since 1995, when the U.S. SIF Foundation first measured the size of the US sustainable and responsible investment universe at $639 billion, these assets have increased more than 18-fold, with a compound annual growth rate of 13.6%.”
Breaking down today’s use of ESG
In terms of overall assets, the report says money managers as a whole incorporate ESG factors “fairly evenly” across environmental, social and governance categories. Money managers incorporate social factors slightly more than environmental and governance criteria. As the report shows, social criteria incorporation by money managers increased 39% from 2016 to $10.8 trillion.
Even so, “climate change” is identified as the most important specific ESG issue considered by money managers in asset-weighted terms; the assets to which this criterion applies more than doubled from 2016 to 2018, reaching more than $3.0 trillion. According to U.S. SIF, “conflict risk” was the leading social criterion at $2.3 trillion assets under management, while assets managed with “human rights” criteria were next, at $2.2 trillion, and experienced much larger growth from 2016.
When looking specifically at the portfolios of U.S. institutional investors, the report identifies some $5.6 trillion in institutional ESG assets. Public funds represented the largest share (more than $3.0 trillion).
Overall, social criteria were applied to $5.2 trillion (more than 93%), representing a 19% increase since 2016. Investment policies related to conflict risk affected $3.0 trillion, making it the single most prominent ESG criterion, in asset-weighted terms. Similar to trends among money managers, tobacco saw some of the largest growth as a single ESG factor, at over 120%.
Continuing a trend that began in 2012, criteria related to climate change and carbon emissions remained the most important environmental issue for these institutions, affecting $2.2 trillion.
“The most prominent social issue after conflict risk was equal employment opportunity and diversity, addressed in $1.6 trillion of institutional assets, a 128% increase from 2016,” the report says. “Investment restrictions related to weapons now affect just over $1.5 trillion in assets, a 78% increase since 2016.”
Important to note, tax-qualified retirement plan assets must be managed in accordance with the Employee Retirement Income Security Act. For both pensions and defined contribution plans, the systematic and explicit inclusion of ESG risks and opportunities must be factored into a deeper process of financial analysis, “which can include adjusting estimated future cash flows or modeled discount rates based upon evaluation of ESG-related risks and opportunities and identifying and measuring the impact of off-balance-sheet ESG-related assets and liabilities.”
According to the report, “public funds” represent both the largest value of ESG assets under management and the largest number of institutional investors incorporating some form of ESG in their investments. Insurance companies rank second in value of ESG assets under management, although only a few institutions are involved.
“These two segments each represent over $2 trillion in ESG assets,” the report says. “Foundations represent the second largest number of institutions engaged in any kind of sustainable, responsible and impact investing, although the affected assets are far less.”