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The Results Are In: Sustainable, Responsible, Impact Investing by U.S. Asset Managers At All-time High — $8 Trillion!

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by Hank Boerner – Chairman & Chief Strategist, G&A Institute

We have an important update for you today: The US SIF Report on “US Sustainable, Responsible and Impact Investing Trends, 2016,” was released this week.

The top line for you today: In the U.S.A., sustainable, responsible and impact (SRI) investing continues to expand — at a rapid and encouraging pace.

As we read the results of 2016 survey report, we kept thinking about the past 30 or so years of what we first knew as “socially responsible,” “faith-based,” “ethical” (and so on) approaches to investing, and that more recently we declared to be sustainable & responsible investing (SRI). And even more recently, adding “Impact Investing”).

At various times over the years we tried to visualize “how” the future would be in practical terms when many more mainstream investors embraced SRI / ESG approaches in their stock analysis and portfolio decision-making.

We’re happy to report that great progress continues to be made. It may at times have seemed to be slow progress for some of our SRI colleagues, especially the hardy pioneers at Domini, Trillium, Calvert, Zevin, Walden, Christian Brothers/CBIS, As You Sow, Neuberger Berman, and other institutions.  But looking over the past three decades, always, in both “up and down” markets, and especially after the 2008 market crash — sustainable, responsible and impact investment gained ground!

And so, we in the U.S. SRI community anxiously look forward to the every-other-year survey of U.S.A. asset owners and managers to measure the breadth and depth of the pool of assets that are managed following ESG methods, SRI approaches, etc.

Here are the key takeaways for you in the just-released survey by the U.S. Forum for Sustainable & Responsible Investment (US SIF), the trade association of the SRI community that has tracked SRI in its survey efforts since 1995-1996, and the US SIF Foundation.

2016 Survey Highlights:

• At the start of 2016, ESG (“environmental/social/governance”) factors were being considered for US$8.72 trillion of professionally-managed assets in the United States of America.

• SRI Market size: that is 20 percent / or $1-in-$5 of all Assets Under Management (AUM) / for all US-domiciled assets under professional management (that is almost $9 Trillion of the total AUM of $40.3 trillion).

• This is a gain of 33% over the total number ($6.572 trillion in AUM) in the previous US SIF survey results at the start of 2014.

• Surveyed for the 2016 report: a total of 447 institutional investors, 300 money (asset) managers, and 1,043 community investment institutions. This can be described as a diverse group of investors seeking to achieve positive impacts through corporate engagement -or- investing with an emphasis on community, sustainability or advancement of women.

• Drivers: Client demand is a major driver – the U.S. asset owners hiring asset (money) management firms are increasingly focused on ESG factors for their investments — as responsible fiduciaries.

• ESG Criteria: Survey respondents in the investment community had 32 criteria to select from in the survey, including E-S-G and product related activities (ESG funds); they could add ESG criteria used as well.

What is important to the investors surveyed?  The report authors cited responses such as:

• Environmental investment factors — now apply to $7.79 trillion in AUM.
• Climate Change criteria – now shape $1.42 trillion in AUM – 5 times the prior survey number.
• Clean Technology is a consideration for managers of $354 billion in AUM.
• Social Criteria are applied to $7.78 trillion in AUM.
• Governance issues apply to $7.70 trillion in AUM, 2X the prior survey.
• Product specific criteria apply to $1.97 trillion in AUM.

The Social criteria (the “S” in ESG) include conflict risk; equal employment opportunity and diversity; labor and human rights issues.

Product issues include tobacco and alcohol; these were the typically “screened out” stocks in the earlier days of SRI and remain issues for some investors today.

Mutual Funds:
Among the investment vehicles incorporating ESG factors into investment management, the survey found 519 registered investment companies (mutual funds, variable annuity funds, ETFs, closed-end funds). Total: $1.74 trillion in AUM.

Alternative Investment Vehicles:
There were 413 alternate investment vehicles identified as using ESG strategies (including private equity, hedge funds, VCs). Total: $206 billion in AUM.

Institutional Investors:
The biggie in SRI, with $4.72 trillion in AUM, a 17% increase since the start of 2014 (the last survey). These owners include public employee funds; corporations; educational institutions; faith-based investors; healthcare funds; labor union pension funds; not-for-profits; and family offices.

Community Investing:
The survey included results from 1,043 community investing institutions, including credit unions; community development banks; loan funds; VC funds. Total: $122 billion in AUM. (These institutions typically serve low-to-moderate income individuals and communities and include CDFI’s.)

Proxy Activism:
SRI players are active on the corporate proxy front: From 2014 to 2016, 176 institutional investors and 49 money managers file / co-file shareholder resolutions at U.S. public companies focused on environmental (E) or social (S) issues. (The number remains stable over the past four years, the report tells us.) The major development was that where such resolutions received 17% approval from 2007 to 2009, since 2013, 30% of resolutions received 30% or more approval.

Methodologies/Approaches:
There are five primary ESG incorporation strategies cited by US SIF: (1) Analyzing, selecting best-in-class companies, positive choices for the portfolio; (2) negative approaches / exclusionary approaches for certain sectors or industries or products by/for the fiduciary; (3) methods of ESG integration — considering various ESG risks and opportunities; (4) impact or “outcome” investing, intended to generate social (“S) or environmental (“E”) impact along with financial return; (5) selecting sustainability-themed funds of various types.

Commenting on the survey results, US SIF CEO Lisa Woll observed that as the field grows, some growing pains are to be expected. . .with the continuing concern that too often, limited information is disclosed by survey respondents regarding their ESG assets. While the number of owners and managers say that they are using ESG factors, they do not disclose the specific criteria used. (This could be, say, criteria for clean energy consideration, or labor issues of various kinds.)

The US SIF biannual survey effort began in 1996, looking at year-end 1995 SRI assets under management. In that first year, $639 billion in AUM were identified. By the 2010 report, the $3 billion AUM mark was reached. That sum was doubled by the 2014 report.

Year-upon-year, for us the message was clear in the periodic survey results: The center (the pioneering asset owner and management firms) held fast and key players built on their strong foundations; the pioneers were joined by SRI peers and mainstream capital market players on a steady basis (and so the SRI AUM number steadily grew); and investors — individuals, and institutions — saw the value in adopting SRI approaches.

Today, $1-in-$5 in Assets Under [Professional] Management sends a very strong signal of where the capital markets are headed — with or without public sector “enthusiasm” for the journey ahead in 2017 and beyond!

There is a treasury of information for you in the report, which is available at: www.ussif.org.

Congratulations to the US SIF team for their year-long effort in charting the course of SRI in 2015-2016:  CEO Lisa Woll; Project Directors Meg Voorhes of the US SIF Foundation and Joshua Humphreys of Croatan Institute; Research Team members Farzana Hoque of the Foundation and Croatan Institute staff Ophir Bruck, Christi Electris, Kristin Lang, and Andreea Rodinciuc.

2016 survey sponsors included: Wallace Global Fund; Bloomberg LP; JP Morgan Chase & Co.; Calvert Investments; TIAA Global Asset Management; Candriam Investors Group; KKR; MacArthur Foundation; Neuberger Berman; Saturna Capital (and Amana Mutual Funds Trust); Bank of America; BlackRock; CBIS (Catholic Responsible Investing); Community Capital Management Inc.; ImpactUs; Legg Mason Global Asset Management / ClearBridge Investments; Morgan Stanley Institute for Sustainable Investing; Sentinel Investments; Trillium Asset Management; Cerulli Associates; and, Walden Asset Management.

A footnote on terminology: Throughout the survey exercise and reporting, terms used include sustainable, responsible and impact investing; sustainable investing; responsible investing; impact investing; and SRI. These are used interchangeably to describe investment practices.

About US SIF:  This is a three-decade old, Washington-DC-based membership association that advances SRI to ensure that capital markets can drive ESG practices. The mission is to work to rapidly shift investment practices toward sustainability, focusing on long-term investment and the generation of positive social and environmental impacts.  SIF Members are investment management and advisory firms; mutual fund companies; research firms; financial planners and advisors; broker-dealers; non-profit associations; pension funds; foundations; community investment institutions; and other asset owners.

Governance & Accountability Institute is a long-time member organization of the U.S. Forum for Sustainable and Responsible Investment (US SIF).

As part of the G&A Institute mission, we are committed to assisting more investing and financial professionals learn more about SRI and ESG — especially younger professionals interested in adopting SRI approaches in their work.  G&A is collaborating with Global Change Advisors to present a one-day certification program hosted at Baruch College/CUNY on December 14, 2016.  Details and registration information is at: https://www.eventbrite.com/e/intro-to-corporate-esg-for-investment-finance-professionals-certification-tickets-29052781652

University Endowments – Fidicuiary Duties – Whose Money is it — What Are “Societal” Responsibilities?

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by Hank Boerner – Chairman, G&A Institute

Many of our nation’s colleges and universities — which are “Social Institutions” — have long had established endowments. Some are truly wealthy — these are pools of assets designed to serve future generations.  Other types of  various types of social institutions” are similarly wealthy. Endowment assets are managed in-house or by outside professional money managers.   Over the years, the college and university endowments have been in focus for sustainable & responsible investors (SRI advocates) — as they are right now.

For example, Harvard University has an endowment fund reported to have  US$36 billion in Assets Under Management (AUM) — the largest of these “funds-for-the-future” of the higher education community in the USA.

The students and other stakeholders would like to see “more responsible” investing by the Harvard endowment, such taking the decision to divestment shares of traditional fossil fuel companies in the portfolio. (think: “ExxonMobil“). Among the arguments, gaining ground. including beyond the university endowments discussion, is that these public companies have “reserves” (such as coal, oil, natural gas) that are important parts of their capital markets valuation, and with climate change and the development of renewable fuel sources and other factors, the reserves on the balance sheet will over time become “stranded assets” – thus, devaluating the business enterprise. That is, the coal or crude oil in the gorund will not be harvested and sold…they will be stranded and of little or no value.  And therefore, as fiduciaries, responsible for the fund in the future, a collision course is set up:  the fund needs in 2050 will be diminished as the value of the corporate holdings moves downward.

And so, students of the Harvard Law School have filed a lawsuit seeking to compel the endowment fiduciaries (the trustees) to divest holdings in fossil fuel enterprises.  Interesting:  their case is based on 17th Century transactions (back when whale oil and wood were the primary energy sources).  In 1640, Harvard College was established as a seminary and documents were filed with the Massachusetts Bay Colony.  Under those documents, the 21st Century students argued that they had standing (to bring the action) under “special interest” provisions.

The endowment leadership responded:  “The endowment is a resource, not and instrument to compel social and political change…” (The New York Times). Harvard President Drew Gilpin Faust has spoken on fossil fuel divestment.  In October 2013, a statement to the Harvard community said in part:  “[I] and members of the Corporate Committee on Shareholder Responsibility have benefitted from conversations [with students] who advocated divestment…while I share their belief in the importance of addressing climate change, I do not believe, nor do my colleagues on the Corporation, that university divestment from the fossil fuel industry is warranted or wise…”

The president also said that “…especially given our long-term investment horizon, we are naturally concerned about ESG factors that may affect the performance of our investments now and in the future…”  Harvard policy is engagement and collaboration, rather than “ostracizing” companies based on their product (such as fossil fuels). The Harvard Management Company brought on a VP for sustainable investing. (You should  read the full statement here: http://www.harvard.edu/president/fossil-fuels to understand the university’s official position on these issues).

Alice M. Chaney, who with six other Harvard students filed the lawsuit to compel Harvard Corporation (the governing body of the university) to divest fossil fuel companies, said the following: “We allege that Harvard’s investment in those companies violate its duties as a public charitable institution by harming students and future generations.” (Cheney is a law school student and member of the Harvard Climate Justice Coalition.)

The students — organized as “Divest Harvard” — have been campaigning on the issue.  The first step was a survey of students in 2012 — 72% at the college and 67% at the law school voted in favor of divestment.  Since then 200 faculty members, 1,000+ alumni, and 63,000 community members have signed divestment petitions, the group says.

The legal arguments:  the Harvard Corporation’s public charitable obligations include managing its endowment so as to protect the ability of Harvard students to learn and thrive. The Corporation also has a responsibility not to act in ways that threaten the health and welfare of future generations. (You can read her statement at: http://billmoyers.com/2014/11/22/suing-harvard/)

The pressure on universities to divest holdings in companies based on ESG issues is a long-time tradition.  American university interests were deciding factors, I believe, in the American and global campaigns to abolish Apartheid practices in South Africa in the 1980s and the aid to combatants in the civil war in Darfur more recently.  (The drive was to get investors out of the stock of US companies “supporting” the Sudan government which was making war on its own populations.)

Beth Dorsey, CEO of Wallace Global Fund and leader of the Divest-Invest Movement, commented on the Harvard University leadership’s opposition to divestment:  “In the last great divestment campaign, Harvard said ‘no’ before it said ‘yes’ and I think if just a matter of time.  Unlike the anti-apartheid movement, this is not just an ethical issue.  There is a powerful financial reason as well…”

As the lawsuit in the Commonwealth of Massachusetts / Suffolk County courts winds on, and the Divest Harvard protests continue, half a world away, the world’s largest Sovereign Wealth Fund – the US$800+ billion AUM Norway Government Pension Fund — just announced it will divest holdings in coal mining companies.  the list of companies will be made public on December 1.  The SWF will not divest oil and gas companies.  (Consider: the wealth of the wealth fund is primarily based on taxes on the country’s North Sea fossil fuels.)

While you think about that last tidbit, consider that the descendants of John D. Rockefeller — the 19th Century Titan of Industry who assembled the giant Standard Oil Company — have decided to divest their fossil fuel investments (in September 2013)! Great and great-great grandchildren Peter O’Neil, Neva Rockefeller Goodwin and Stephen B. Heintz are in the lead for the Rockefeller Brothers Fund, which has $860 million AUM.

Said Stephen Heintz:  “John D. Rockefeller, founder of Standard Oil, moved American out of whale oil and into petroleum.  We are quite convinced that if he were alive today, as an astute business man looking out to the future, he would be moving out of fossil fuels and investing in clean, renewable energy…”   (More about this in The Guardian coverage of the announcement at: http://www.theguardian.com/environment/2014/sep/22/rockefeller-heirs-divest-fossil-fuels-climate-change)

The Rockefeller family announcement was an important part of a “momentum moment” for fossil fuel divestment proponents.  The influential World Council of Churches joined the divestment movement. American cities are adopting similar policies (as many did in the anti-Apartheid movement).  Advocates are working under the umbrella of the Divest-Invest Movement.  To date some 800 institutional investors have pledged to withdraw more than $50 billion in fossil fuel investment over the coming 5 years.

ExxonMobil’s position?  In October The Wall Street Journal headline read:  “Exxon Blasts Movement to Divest From Fossil Fuels…the oil giant seeks to counter the campaign…”  The article by Ben Geman said that the company published a “lengthy attack about the divestment movement, positioning the argument that [the movement] is at odds with the need for poor nations to gain better access to energy, as well as the need for fossil fuels to meet global energy demand for decades to come…” The author is Ken Cohen, VP for Public and Government Affairs (writing in the company’s blog.)

“Almost every place on the planet where there is grinding poverty,” he wrote, “there is energy poverty.  Wherever there is subsistence living, it is usually because there is little or no access to modern, reliable forms of energy.”

And so, the battle lines are formed — advocates vs. university, asset owners (and managers) vs big fossil fuel companies, institutions and fiduciaries (in Exxon’s view) vs. the people of poor nations.

The positions (and actions) of two important institutional investors could create a tipping point:  Harvard University (with considerable wealth, influence, prestige, powerful alumni, world-class faculty, a powerful publishing arm and on and on) and the Norwegian Sovereign Fund, which invests in literally thousands of public companies…and soon will have $1 trillion in AUM to leverage in pursuit of its social / societal issues policies and investment actions.

Stay Tuned to the Fossil Fuel Divestment Movement…and the push back by giants of the fossil fuel industry and their allies in the US Congress and other power centers.

 

 

 

 

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Flash — $1 in $6 in Capital Markets Now Invested Using ESG Criteria – US$6+ Trillion AUM Total

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by Hank Boerner – Chairman, G&A Institute

Flash Report from the Front Lines of Sustainable & Responsible Investing — here’s a number that we will be seeing repeated many times over the coming days and months:  US$6.57 trillion of assets under management are now invested using sustainable, responsible and impact investing strategies.  That is more than $1 in every $6 under professional management in the United States of America.

These assets comprise almost 18% of the total $36.8 trillion U.S. AUM tracked by Cerulli Associates.

From 1995 – the first US SIF survey at year end — to December 2013, the universe has grown 929% —  a compound annual growth rate of 13.1%.

Money managers report using ESG integration strategies across asset classes for AUM of $4.80 trillion — that is triple the amount reported by US SIF at the beginning of 2012 (the last survey).

Asset Owners — public employee pension funds, foundations, educational institutions (endowments), religious institutions — applying ESG criteria grew to $4.04 trillion (up 77% since start of 2012). Note that a subset of asset managers surveyed and answering “why” they offer ESG products, (119 in all) said that 80% of their clients demanded the use of ESG criteria..

The report is from US SIF – The US Forum for Sustainable & Responsible Investment (US SIF), the trade organization for professionals, firms, institutions and organizations, engaged in sustainable, responsible and impact investing.  (Variously you may refer to these activities as SRI, ESG, Triple Bottom Line, ethical, socially & responsibly investing, and other terms.)  Every other year US SIF conducts a comprehensive survey of investment trends / activities by individuals, institutions, investment companies, asset managers, financial institutions, mutual fund advisors, and others, to determine the overall SRI assets.

The 10th biennial report published this week covers sustainable investment and impact investment AUM at the beginning of 2014 by 480 institutional investors, 308 money managers and 880 community investment institutions that apply various environmental, social and governance (ESG) criteria in their investment activities.

Special recognitions to the key players in the announcement launch effort this week:  Lisa Woll, CEO of US SIF and her team involved in the survey effort; report authors Meg Vorhees of US SIF and Josh Humpreys of Croatan Institute.  The announcement made was at Bloomberg LP — hosted by Bloomber’s Curtis Ravenel.  Presentations were by US SIF members Paul Hilton (Trillium); Hilary Irby (Morgan Stanley); Amy O’Brien (TIAA-CREF).  also, Michael Garland (New York City Comptroller’s Office).and Ellen Dorsey (Wallace Global Fund).