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The Sustainable Shareholder

2014: The year sustainable investment went mainstream

Client demand is driving a dramatic rise in the use of sustainable, responsible and impact investment strategies.

Sustainable, responsible and impact investing assets have soared 76 percent in the last two years, according to the US SIF Foundation. That’s the largest two-year increase in at least the last two decades — a clear and impressive indication that SRI as an investment strategy has become mainstream.

SRI assets reached $6.57 trillion at the start of 2014, up from $3.74 trillion at the beginning of 2012, the US SIF Foundation revealed in its biennial "Report on US Sustainable, Responsible and Impact Investing Trends 2014." At this new level, investment strategies that integrate some form of environmental, social and governance criteria account for more than one out of every six professionally managed investment dollars in the United States. That’s nearly double what it was only two years ago.

"The findings released today clearly demonstrate that investment decisions using sustainable, responsible and impact investing strategies are on the rise," said Lisa Woll, CEO of US SIF and the US SIF Foundation, said in a statement. "Sustainable investment strategies are being applied across asset classes to promote corporate social responsibility, build long-term value for companies and their stakeholders, and foster businesses that will yield community and environmental benefits."

According to the 480 institutional investors, 308 money managers and 880 community investment institutions participating in the survey, the top reason for offering ESG products remains client demand. Following closely behind are interest in fulfilling a particular mission, improving returns and effectively managing risk.

The single largest factor behind this growth: the addition of new investment vehicles and a continuing increase in the size of existing products. In the past two years, the assets managed by investment firms considering ESG issues more than tripled from $1.4 trillion to $4.8 trillion. The largest group of asset owners responsible for this increase includes public pension funds, foundations, educational endowments and religious institutions, which currently hold $4.04 trillion in ESG assets, an increase of 77 percent since 2012.

The number of private equity and other alternative investment funds considering ESG factors also nearly doubled in the past two years while adding 35 new funds. This segment of the industry grew from 301 funds with $132 billion in assets to 336 funds with $224 billion in assets in 2014.

Leading investor ESG priorities

There were 672 funds integrating environmental issues, with nearly $3 trillion in assets. For those funds, climate change remains the most significant environmental factor in terms of assets, affecting $828 billion. For the first time, the report tracked fossil fuel free portfolios, made popular by the likes of Investor demand for fossil fuel divestment totals $30 billion via 95 strategies. Other popular green economy issues: pollution and toxics issues, affecting $266 billion; green building and smart growth, representing $166 billion in assets via 255 vehicles; and clean technology and renewable energy, totaling over $130 billion in nearly 400 strategies.

Since the Sandy Hook Elementary School shooting, investors have placed almost $600 billion in nearly 300 managed strategies that exclude weapons and military contractors, which is four times the number reported in 2012. This amount is outpaced only by tobacco and alcohol, which continue to be the most popular ESG avoidance issues. Rounding out the top five are gambling and pornography.

While avoiding companies based in Sudan continues to be the single largest ESG issue integrated into portfolios in terms of asset size, corporate governance issues, such as director’s independence, board diversity and responsiveness to shareholders, saw a four-fold increase to $230 billion in assets affected, followed closely by executive pay.

Growing shareholder resolutions

In terms of shareholder resolutions filed with companies, $1.72 trillion held by 202 institutional investors and money managers was leveraged in shareholder resolutions filed on ESG issues in the past two years. The largest jump in activity was in the realm of climate change risk, as 72 measures addressing concerns about climate risk were filed this year, more than double the number in 2012. A significant number of commitments also were made by companies specifically engaged to disclose and reduce their greenhouse gas emissions.

US SIF Foundation, the report’s producer, is a research organization connected to the trade association for the SRI industry, US SIF: The Forum for Sustainable and Responsible Investment. The survey was sent to 1,500 investment management firms and institutional asset owners, with data calculated as of Dec. 31, 2013. This is the 10th Trends Report produced by US SIF in the past 20 years; in 1994 there were fewer than $200 billion in professionally managed SRI assets in the market.

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