US Sustainable investing Trend

The research of the US Forum for Sustainable and Responsible Investment – US SIF, for the 2022 Trends report took place as major regulatory developments occurred that will likely shape sustainable investing for years to come. Indeed, the US Securities and Exchange Commission (SEC) released 2 proposals – one to prevent misleading fund names and another one to require greater transparency around funds’ consideration of ESG factors. In addition, the Department of Labor ruled that ERISA governed pension plans has issued a final rules that will permit fiduciaries to consider environmental, social, and governance (ESG) factors more readily in investment decisions that took effect on 30th January 2023.

The 2022 Trends report, like the 13 editions before it, counted two main strategies as sustainable investing:

  • ESG incorporation–applying various ESG criteria in investment decision-making and
  • portfolio construction–and filing shareholder resolutions on ESG issues

However, this year the US SIF Foundation modified its methodology, primarily in response to the rapid growth of the field and the lack of information from a growing number of institutions on the specific ESG criteria applied in firmwide ESG integration. Thus, the methodology required more granular information regarding the incorporation of ESG issues in order to be included in the tally of sustainable investment assets.

Additionally, compared to their 2020 responses, multiple money managers reported a modest to steep decline in ESG assets under management, which the US SIF Foundation believes is a reaction to the SEC’s release of the fund disclosure proposal. Together, these two developments resulted in fewer sustainable investing assets than reported in the 2020 report.

US Sustainable investing Trend

The Trends Report

The biennial Report on US Sustainable Investing Trends – provides data on the US asset management firms and institutional asset owners using sustainable investment strategies and examines the environmental, social and corporate governance issues they consider in managing their portfolios. The report details the types of investors involved, leading ESG criteria and the various motivations for sustainable investing.

The report identified $7.6 trillion in US-domiciled assets at the beginning of 2022 held by 497 institutional investors, 349 money managers and 1,359 community investment institutions that apply various ESG criteria in their investment decision-making and portfolio construction.

In addition, 154 institutional investors and 70 money managers controlling $3.0 trillion in assets under management led or co-led shareholder resolutions on ESG issues from 2020 through the first half of 2022.

Eliminating double counting for assets involved in both ESG incorporation and filing shareholder resolutions produces the net total of $8.4 trillion in sustainable investing strategies at the start of 2022 (which represents 12.6% of the $66.6 trillion in total US assets under professional management).
This phenomenon is similar to what occurred in Europe after the EU’s Sustainable Finance Disclosure Regulation required enhanced disclosure on sustainable investment products.

“Money managers and institutional investors are using ESG criteria and shareholder engagement to address a plethora of issues, including climate change, conflict risk and anti-corruption as well as labor and equal employment opportunity, corporate political activity and human rights. With new issues such as biodiversity being added to the Trends Report survey, we are confident that there will be continued growth in the ESG issues that investors will consider in the future.”

Lisa Woll, US SIF Foundation CEO

US Sustainable investing Trend

ESG Incorporation by Money Managers

Using the US SIF Foundation’s modified methodology, this report identified 349 money managers and 1,359 community investment institutions incorporating ESG criteria into their investment decisionmaking processes across a total of $5.6 trillion in AuM.

Breakdown by investment vehicles:

  • $1.2 trillion (22%) in assets were managed through registered investment companies such as mutual funds, exchange-traded funds, variable annuities and closedend funds.
  • $762 billion (14%) in assets were managed through alternative investment vehicles, such as private equity and venture capital funds, hedge funds and property funds.
  • $458 billion in assets were managed by community investing institutions.
  • $186 billion in assets were managed through other commingled funds.

53% of the total assets reported by 135 money managers using specific ESG criteria could not readily be categorized by investment vehicle type, such as mutual fund or private equity fund, because those managers did not provide adequate disclosures. These “Undisclosed Investment Vehicle Assets” therefore constitute a pool of $3 trillion in reported ESG assets under management.

The leading ESG criteria reported by money managers:

  • Climate change is the most important specific ESG issue reported by money managers in asset-eighted terms, addressed across $3.4 trillion in assets.
  • In terms of other environmental criteria, money managers reported applying fossil fuel divestment policies across $1.2 trillion in assets, ranking it as fourth among all specific ESG criteria.
  • Avoidance of military/ weapons and tobacco are ranked as second and third, affecting $1.8 trillion and $1.7 trillion in assets under management, respectively.
  • The leading specific governance criterion is anticorruption, addressed across $1.0 trillion, followed by board issues across $926 billion in assets under management.
  • Human rights are the most prominent social issue in asset-weighted terms, addressed across $987
    billion, followed by equal employment opportunity (EEO)/diversity across $765 billion, and health and safety across $701 billion in assets under management.

US Sustainable investing Trend

ESG Incorporation by Institutional Investors

The US SIF Foundation also researched the ESG incorporation practices of institutional asset owners.
Because money managers generally do not disclose confidential information about their institutional clients, the datas received show how and why they incorporate ESG criteria into their investment analysis and portfolio selection. The group included institutional asset owners and plan sponsors such as public funds, insurance companies, educational institutions, philanthropic foundations, labor funds, hospitals and healthcare plans, faith-based institutions, other nonprofits and family offices.

The report identified 497 institutional asset owners applying ESG incorporation practices across $6.6 trillion in AuM.

  • Among the institutional investors, public funds hold the largest share of assets using ESG criteria and represent the greatest number of institutions reporting the incorporation of some form of ESG criteria intheir investments.
  • For the first time, institutional investors reported climate change as the leading ESG criterion they addressed in asset-weighted terms, affecting $4.0 trillion.
  • Another leading environmental issue investors considered is sustainable natural resources and agriculture, reflected in $2.8 trillion in assets.
  • The top social issue in asset-weighted terms is the restriction of investments in companies doing business with conflict risk countries, affecting $3.3 trillion.
  • Other prominent social issues are health and safety criteria, tracked for the first time and addressed across $2.1 trillion, and EEO/diversity, affecting $2.0 trillion.
  • The top governance criterion identified for institutional investors is board issues, which includes the
    consideration of the directors’ independence, diversity, pay and responsiveness to shareholders, across $2.9 trillion.
  • Tobacco, a sustainable investment issue for decades, affects $2.7 trillion in institutional investor capital.

“When responsible investors analyze a company’s fundamentals in conjunction with ESG criteria, it improves both investment and societal outcomes”

Marian Macindoe, Head of ESG Stewardship at Parnassus Investments – the Visionary Sponsor of Trends. 

The request to acquire the 2022 Report On US Sustainable Investing Trends is accessible here.

US Sustainable investing Trend

Source: US SIF – US Sustainable investing Trend