Jody Lowe is President and Managing Director at Lowe Group, a financial PR agency offering media relations and content marketing services.
In my 30-plus years of working with asset managers and registered investment advisors, I’ve seen the field of sustainable investing transform — from a niche approach to one that commands attention from a broad swath of investment managers, investors and policy-makers.
The first US SIF Foundation Trends Report on Sustainable and Responsible Investment, published in 1995, tracked just $639 billion in total assets under management. Fast forward to 2020 when, in its most recent report, the US SIF Foundation tracked assets of more than $17 trillion. The Global Sustainable Investment Alliance recently reported global sustainable assets under management have reached $35.3 trillion.
But it’s not just the size of the field that has changed. Early on, the most common sustainable investment approach was to apply a negative screen to remove companies from a portfolio that the manager did not view as responsible or sustainable. Today, a number of seasoned sustainable investors systematically evaluate investments using a robust set of environmental, social and governance (ESG) factors and have built their businesses by promoting their ESG credentials.
Even managers who hadn’t previously labeled themselves sustainable investors often informally consider governance issues or contemplate how a warming climate might increase the risk of certain investments. Now, many of those managers are signing on to the Principles of Responsible Investment (PRI) and recognizing that consideration of ESG is material to assessing the risk and return potential of all investments.
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At the same time, demand for sustainable strategies is growing among investors of all stripes. Until recently, investors often assumed that investing sustainably necessarily meant accepting lower returns. But as numerous studies have provided a growing body of evidence to the contrary, investors have come to understand that a sustainable investment strategy can actually lower risk without sacrificing return potential.
Several recent policy changes point to growing awareness of the need for sustainable investing and support for the continued growth of the industry. In just the first half of 2021 alone, policymakers took several actions to lower the barriers to ESG in ERISA-governed retirement plans: The Biden administration overturned limitations enacted by the previous administration related to the consideration of ESG factors; the DOL committed to revisit and release new guidance on these rules, and a bill was introduced in both the Senate and the House to allow consideration of ESG factors.
In addition, the SEC issued a request for information on climate risk and relevant ESG disclosures, and the White House issued an executive order on climate-related financial risk. Lastly, the Federal Thrift Savings Plan announced the roll-out of a mutual funds window in 2022 that will allow Federal employees to select ESG-related investments in their retirement plans.
As sustainable investing continues to deepen its reach in the mainstream, industry growth will depend on expanded impact measurement, from firms like Sustainalytics and MSCI, as well as greater and more meaningful disclosure from portfolio companies. In addition, we will certainly see increased scrutiny on practitioners. In fact, in its recent risk alert, the SEC makes clear that it will be paying attention to how managers describe their process and disclose results.
That means asset managers should think carefully about how they communicate their approach to investing sustainably. It is important for managers to clearly identify their investment process, including the factors considered, and show how that process is applied across a portfolio, how risk is assessed and how outcomes are measured.
Today, most of our asset management clients are engaged in sustainable investing in some way or another. They have to be. Their clients are demanding it. And as more individuals and asset managers consider themselves sustainable investors, we expect only greater demand for clear communication and transparency.