Breaking News: $12 Trillion in Professionally Managed Sustainable Investment Assets — $1-in-$4 of Total U.S. Assets

by Hank Boerner – Chair and Chief Strategist – G&A Institute

Call it “sustainable and responsible investing” or “SRI” or “ESG investing” or “impact investing” – whatever your preferred nomenclature, “sustainable investing” in the U.S.A. is making great strides as demonstrated in a new report from US SIF.

The benchmark report issued today – “The Report on US Sustainable, Responsible and Impact Investing Trends 2018” – by the U.S. Forum for Sustainable and Responsible Investment (US SIF) puts things in perspective for investors and corporate managers:

  • At the beginning of 2018, the institutional owners and asset management firms surveyed reported total sustainable investment at US$12 trillion AUM – that is 26% of the total assets under professional management in the U.S.A. — $1-in-$4 of all investable assets!
  • That’s an increase of 38% since the last US SIF report at the start of 2016. The AUM of sustainable investments then was $8.72 trillion. That was $1-in-$5.
  • And that was an increase of 33% since the survey of owners and managers at the start of 2014.
  • Sustainable investing jumped following the 2008 financial crisis, with growth of 240% from 2012 to 2014.

The US SIF bi-annual survey of investors began in 1995, when the total of sustainable investments professionally managed was pegged at $639 billion. There has been an 18-fold increase in sustainable investing assets since then – at a compound rate of 13.6% over the years since that pioneering research was done.

The researchers queried these institutions in 2018:

  • 496 institutional owners (fiduciaries such as public employee pension funds and labor funds – these represented the component of the survey results at $5.6 trillion in ESG assets**).
  • 365 asset/money managers working for institutional and retail owners;
    private equity firms, hedge fund managers, VC funds, REITS, property funds;
    alternative investment or uncategorized money manager assets);
  • 1,145 community investing institutions (such as CDFIs).

What is “sustainable investing”?  There are these approaches adopted by sustainable investors:

  • Negative/exclusionary screening (out) certain assets (tobacco, weapons, gaming);
  • Positive/selection of best-in-class considering ESG performance (peer groups, industry, sector, activities);
  • ESG integration, considering risks and opportunities, ESG assets and liabilities);
    Impact investing (having explicit intention to generate positive social and environmental impact along with financial return);
  • Sustainability-themed products.

The top ESG issues for institutional investors in 2018 included:

  • Conflict Risk (terror attacks, repressive regimes) – $2.97 trillion impact;
  • Tobacco related restrictions – $2.56 trillion
  • Climate Change / Carbon-related issues – $2.24 trillion
  • Board Room issues – $1.73 trillion
  • Executive Pay – $1.69 trillion

Asset managers identified these issues as among the most important of rising concerns:

  • Climate change and Carbon
  • Conflict risk

Prominent concerns for asset owners included:

  • Transparency and Corruption
  • Civilian firearms / weapons
  • a range of diversity and equal employment opportunity issues.

The Proxy Voting Arena

The shareowners and asset managers surveyed regularly engage with corporate executives to express their concerns and advocate for change in corporate strategies, practices and behaviors through presentation of resolutions for the entire shareholder base to vote on in the annual corporate elections.

From 2016 to 2018 proxy seasons these resolutions were focused on:

  • Proxy access for shareowners (business associations have been lobbying to restrict such access by qualified shareowners).
  • Corporate Political Activity (political contributions, lobbying direct expenses and expenses for indirect lobbying by business groups with allocated corporate contributions).
  • A range of environmental and climate change issues.
  • Labor issues / equal employment opportunity.
  • Executive compensation.
  • Human Rights.
  • Call for independent board chair.
  • Board Diversity.
  • Call for sustainability reporting by the company.

Public employee pension systems/funds led the campaigns with 71% of the resolutions filed in 2016, 2017 and 2018.

Labor funds accounted for 13% of filings.

Asset/money management firms accounted for 11.5%.

A total of 165 institutional owners and 54 asset managers filed or co-filed resolutions on ESG issues at the beginning of the 2018 proxy voting season.

The ESG Checklist

The institutions and asset managers queried could answer queries that addressed these ESG, community, product factors in describing their investment analysis, decision-making and portfolio construction activities. This is a good checklist for you when discussing ESG issues and topics with colleagues:

The “E” – Environmental:

  • Clean technology
  • Climate change / carbon (including GhG emissions)
  • Fossil fuel company divestment from portfolio, or exclusion
  • Green building / smart growth solutions
  • Pollution / toxics
  • Sustainable Natural Resources / Agriculture
  • Other E issues

The “S” – Social (or “societal”):

  • Conflict risk (repressive regimes, state sponsors of terrorism)
  • Equal employment opportunity (EEO) / diversity
  • Gender lens (women’s socio-economic progress)
  • Human rights
  • Labor issues
  • Prison-related issues (for-profit prison operators)
  • Other S issues

The “G” – Corporate Governance:

  • Board-related issues (independence, pay, diversity, response to shareowners)
  • Executive pay
  • Political contributions (lobbying, corporate political spending)
  • Transparency and anti-corruption policies

Product / Industry Criteria:

  • Alcohol
  • Animal testing and welfare
  • Faith-based criteria
  • Military / weapons
  • Gambling
  • Nuclear
  • Pornography
  • Product safety
  • Tobacco

Community Criteria:

  • Affordable housing
  • Community relations / philanthropy
  • Community services
  • Fair consumer lending
  • Microenterprise credit
  • Place-based investing
  • Small and medium business credit

The report was funded by the US SIF Foundation to advance the mission of US SIF.

The mission: rapidly shift investment practices towards sustainability, focusing on long-term investment and the generation of positive social and environmental impacts. Both the foundation and US SIF seek to ensure that E, S and G impacts are meaningfully assessed in all investment decisions to result in a more sustainable and equitable society.

The bold name asset owners and asset managers and related firms that are members of US SIF include Bank of America, AFL-CIO Office of Investment, MSCI, Morgan Stanley, TIAA-CREF, BlackRock, UBS Global Asset Management, Rockefeller & Co, Bloomberg, ISS, and Morningstar.

Prominent ESG / sustainable investment players include Walden Asset Management, Boston Common Asset Management, Clearbridge, Cornerstone Capital, Neuberger Berman, As You Sow, Trillium Asset Management, Calvert Investments (a unit of Eaton Vance), Domini Impact Investments, Just Money Advisors, and many others.

The complete list is here: https://www.ussif.org/institutions

Information about the 2018 report is here: https://www.ussif.org/blog_home.asp?display=118

About the US SIF Report:  The report project was coordinated by Meg Voorhees, Director of Research, and Joshua Humphreys, Croatan Institute.  Lisa Woll is CEO of US SIF.  The report was released at Bloomberg LP HQs in New York City; the host was Curtis Ravenel, Global Head of Sustainable Business & Finance at Bloomberg. q1

Governance & Accountability Institute is a long-time member. EVP Louis D. Coppola is the Chair of the US SIF Company Calls Committee (CCC) which serves as a resource to companies by providing a point of contact into the sustainable investment analyst community

** Institutional owners include public employee retirement funds, labor funds, insurance companies, educational institutions, foundations, healthcare organizations, faith-based institutions, not-for-profits, and family offices.

Proof of Concept for Sustainable Investing: The Influential Barron’s Names the Inaugural “The Top 100 Sustainable Companies — Big Corporations With The Best ESG Policies Have Been Beating the Stock Market.”

By Hank Boerner – Chairman and Chief Strategist, G&A Institute

Barron’s 100 Most Sustainable Companies

Barron’s is one of the most influential of investor-focused publications (in print and digital format) and a few months ago (in October), the editors published the first of an ongoing series of articles that will focus on ESG performance and sustainable investing, initially making these points:

  • Barron’s plans to cover this burgeoning style of investing on a more regular basis. A lot of possible content that was developed was left on the cutting room floor, the editors note.
  • Says Barron’s: “We are only in Version 1.0 of sustainable investing. 2.0 is where ESG is not a separate category but a natural part of active management.”
  • And:  “Given the corporate scandals of recent days (Wells Fargo, Equifax, Chipotle, Volkswagen, Valeant Pharmaceuticals), it is clear that focus on companies with good ESG policies is the pathway to greater returns for investors!”

The current issue of Barron’s (Feb 5, 2018) has a feature article and comprehensive charting with this cover description:

The Top 100 Sustainable Companies – Big Corporations With the Best ESG Policies Have Been Beating the Market.”

Think of this as proof of concept: The S&P 500® Index Companies returned 22% for the year 2017 and the Barron’s Top 100 Sustainable Companies average return was 29%.

The 100 U.S. companies were ranked in five categories considering 300 performance indicators.  Barron’s asked Calvert Research and Management, a unit of Eaton Vance, to develop the list of the Top 100 from the universe of 1,000 largest publicly-held companies by market value, all headquartered in the United States.

Calvert looked at the 300 performance indicators that were provided by three key data and analytic providers that serve a broad base of institutional investors:

  • Sustainalytics,
  • Institutional Shareholder Services (ISS)
  • and Thomson Reuters ASSET4 unit.

Five umbrella categories were considered:

  • Shareholders
  • Employees
  • Customers
  • Planet
  • Community

There were items considered in the “shareholders” category, like accounting policies and board structure; employee workplace diversity and labor relations; customer, business ethics and product safety; planet; community; GHG emissions; human rights and supply chain.

We can say here that “good governance” (the “G” in ESG) is now much more broadly defined by shareholders and includes the “S” and “E” performance indicators (and management thereof), not the formerly-narrow definitions of governance. Senior managers and board, take notice.

Every company was ranked from 1-to-100, including even those firms manufacturing weapons (these firms are usually excluded from other indexes and best-of lists, and a number of third party recognitions).

Materiality is key: the analysts adjusted the weighting of each category for how material it was for each industry. (Example: “planet” is more material for chip makers using water in manufacturing, vs. water for banking institutions – each company is weighted this way.)

The Top 100 list has each company’s weighted score and other information and is organized by sector and categories; the complete list and information about the methodology is found at Barron’s.com.

The Top 5 Companies overall were:

  • Cisco Systems (CSCO)
  • salesforce.com (CRM)
  • Best Buy (BBY)
  • Intuit (INTU)
  • HP (HPQ)

The 100 roster is organized in categories:

  • The Most Sustainable Consumer Discretionary Companies (Best Buy is at #1)
  • The Most Sustainable Financials (Northern Trust is #1) – Barron’s notes that there are few banks in the Top 100. Exceptions: PNC Financial Services Group and State Street.
  • The Most Sustainable Industrials (Oshkosh is ranked #1)
  • The Most Sustainable Tech Outfits (Cisco is at the top)

Familiar companies names in the roster include Adobe Systems, Colgate-Palmolive, PepsiCo, Deer, UPS, Target, Kellogg, Apple, and Henry Schein.

Singled out for their perspectives to be shared in the Barron’s feature commenting on the ESG trends: John Wilson, Cornerstone Capital; John Streur, Calvert; Calvet Analyst Chris Madden; Paul Smith, CEO of CFA Institute; Jon Hale, Head of Sustainability Research at Morningstar.

Calvert CEO John Streur noted: “This list gives people insight into companies addressing future risks and into the quality of management.”

Top-ranked Cisco is an example of quality of management and management of risk: The company reduced Scope 1 and 2 GHG emissions by 41% since 2007 and gets 80% of its electricity from renewable sources.

This is a feature article by Leslie P. Norton, along with a chart of the Top 100 Companies.

She writes: “…Barron’s offers our first ranking of the most sustainable companies in the U.S. We have always aimed to provide information about what keenly interests investors – and what affects investment risk and performance…” And…”what began as an expression of values (“SRI”) is finding wider currency as good corporate practices…”

The complete list of the top companies is at Barron’s com. (The issue is dated February 5th, 2018)  You will need a password (for subscribers) to access the text and accompanying chart.

For in-depth information: We prepared a comprehensive management brief in October 2017 on Barron’s sustainable coverage for our “G&A Institute’s To the Point!” web platform: https://ga-institute.com/to-the-point/proof-of-concept-for-sustainable-investing-barrons-weighs-in-with-inaugural-list-of-top-100-sustainable-companies/