Originally Published December 6, 2016
The US SIF Foundation has published its latest Trends Report on sustainable, responsible, and impact investing. On the one hand, this is a statistical snapshot of US-domiciled assets in the ESG/SRI field at years' end 2015. On the other hand, it offers fascinating historical material, making it clear how we got here.
Environmental, social, and governance considerations now affect $8.72 trillion in professionally-managed assets, which is one-fifth of the total of invested assets under professional management.
From a demand side point of view, the growth of the market is reflected in the launch of new services tracking the funds that market themselves as ESG, and assessing how they are voting their shares on ESG issues.
From a regulatory point of view, the U.S. Department of Labor facilitated the growth of the industry in October 2015 when it opened the door for private sector employers to put SRI fund options in the retirement plans they offer their workers.
Contemporary trends date to the activism of the late 1960s. The Council on Economic Priorities, in 1969, began rating companies on their social and environmental performance. Another development that year: the Tax Reform Act gave U.S. foundations the option of meeting their charitable distribution requirements through program-related investments rather than simple grants. Such program-related investments in turn "laid the groundwork," in the words of the US SIF Foundation, "for what eventually developed into the community investing industry."
In 1971, the first modern SRI mutual fund came into being: the Pax World Fund. It avoided investments in tobacco, alcohol, nuclear power, and military contractors. It also considered labor and environmental matters.
In 1972, a group of foundations and institutions of higher learning created the Investor Responsibility Research Center. The following year, religious investors created an analogous institution, the Interfaith Center on Corporate Responsibility.
The Community Reinvestment Act of 1977 gave a boost to the idea of investing in low and moderate income communities.
Calvert launched its Calvert Social Investment Fund in 1982: this was the first investment fund boycotting apartheid.
In the 1990s, indexing joined the SRI/ESG Scene. The Domini 400 Social Index began in May 1990 - and it is now known as the MSCI KLD 400 Social Index (NYSEARCA:TOK).
Ten years later (2000), Calvert introduced its own Social Index, now the Calvert U.S. Large Cap Core Responsible Index.
Also in 2000, Jantzi Research initiated its Jantzi Social Index, partnering with both Dow Jones and State Street Global Advisors to track the Canadian companies that meet its criteria.
The Universe Today
Funds involved in the ESG/SRI universe today include 519 registered investment companies, a category that includes mutual funds, variable annuity funds, ETFs, and closed-end funds, accounting for $1.74 trillion in ESG assets. It includes another 413 alternative vehicles, PC, PE, hedge funds, and responsible property funds. These have a combined total of more than $652 billion in AUM.
This space includes a total of 1,043 community investing institutions (CIIs), which manage another $122 billion with as mentioned above an express mission of serving low and moderate income people and places.
There are also other pooled products, unspecified vehicles, and separate accounts involved. These products amount to more than another $6 trillion in ESG assets.
The "E" of ESG
Among the environmental concerns represented in the ESG world, the most significant is climate change, which motivates fossil fuel restrictions or divestment policies in portfolios. Shareholders have filed 93 resolutions pertaining to climate change this year. They have also negotiated commitments from public companies over reporting on climate change or reducing greenhouse gas emissions.
Institutional investors concerned with the issue (more than 120 of them) have formed the Investor Network on Climate Risk, which represents more than $15 trillion in assets under management. INCR has successfully petitioned both U.S. and Canadian securities regulators to issue guidance concerning the disclosure of material climate change risks.
The US SIF Foundation's report includes a quantification of "shareholder proposals on key environmental and social issues 2014-16." Proposals on political spending and lobbying are the most common. Roughly 126 such resolutions have been posted in each of those three years. The U.S. Supreme Court's decision in the Citizens United case of 2010 stimulated activist concern on that point. Climate change, though, is the second most common motivation for resolutions (roughly 85 each year).