Social impact investing takes off

The amount of sustainable investment assets in the US has soared over the past two years.

Summary: In the US, sustainable investment assets have grown by 76% to $US6.57 trillion in the past two years, and now represent 18% of all professionally managed US assets. Most fund managers say they have developed more responsible products due to client demand, often from women and millennials. Public companies are trying to implement socially responsible trading standards to protect themselves from reputational damage.

Key take-out: Fund companies are following the money and rushing to sign up to the UN principles for responsible investment.

Key beneficiaries: General investors. Category: Investment portfolio construction.

The once small community of investors looking for returns in environmentally- and socially-sensitive companies just became a lot bigger. That’s according to the biennial study put out by the US SIF Foundation, a non-profit advocate for the socially-responsible investing industry. The US SIF study claims that, in the past two years, “sustainable, responsible and impact investing” assets (SRI) in the US have grown by 76% to $US6.57 trillion. We covered the domestic social impact investing market in Bonds for the better, October 15.

Socially-responsible investing assets are now $US6.6 trillion or 18% of professionally-managed assets.

Do-good dollars now represent 18% of the total $US36.8 trillion in professionally-managed US assets. It’s the clearest indication yet that the industry has reached a tipping point, as large publicly-traded companies, family offices, and traditional money managers join the ranks of converts. This bodes well for the blossoming industry, says US SIF’s CEO Lisa Woll, who sees SRI assets growing to 25% of the US’s total assets under management, in the next four years.

Consider just the changing nature of the organisation’s own 300 members. “In the beginning, we had the early actors like Calvert Investments and Trillium Asset Management, but now firms like Bloomberg and Morgan Stanley have joined,” she says. Among the more recent converts are private-equity fund managers and large family offices; the next wave, Woll predicts, will be wealthy individual investors and their families.

The term SRI, as defined by US SIF, is a catchall that includes socially-responsible investing – screening against, say, companies that make alcohol or weapons – and the more nascent practice of social-impact investing, in which folks aim to invest in companies that generate measurable social or environmental impact. US SIF has been tracking the industry since 1995, but has never seen growth comparable to what was observed in the past two years.

What has changed? US SIF mined data from nearly 1,700 pension funds, foundations, endowments, fund managers and banks. It found that since 2012, fund assets managed by money managers who consider environmental, social, and governance issues (ESG) have grown threefold to $4.8 trillion. The trend is driven by investors, the organisation finds, with 80% of fund managers citing client demand for why they have developed ESG products. That demand is often driven by women and millennials who want a socially-conscious diversified portfolio, not just the classic grab-bag of stocks and bonds.

So fund companies are simply following the money, rushing to supply new product. Woll says, just look at the recent signatories of the United Nation’s “Principles for Responsible Investment” initiative, a voluntary list that develops standards for the investment industry. Bank of America and Vanguard Group have both signed up, proving that the biggest US companies are scrambling to attach their names to this client-driven trend and to be seen as on the forefront of the movement. It’s early days, so signing up for the UN’s principles only requires firms like Vanguard to disclose which asset classes consider responsible-investing issues before investing, and then detail how the firm evaluates external managers for ESG products. Reporting the actual percentage of ESG exposure in a fund is, at this early stage, still voluntary.

In the meantime, environmentally-sensitive students across the country have recently been pressuring universities, such as Stanford and Yale, to divest the roughly $US22 billion that are held in fossil fuel-related endowments. And, in October, the establishment $US860 million Rockefeller Brothers Fund, benefitting the heirs of the Standard Oil fortune, announced it would unload the roughly 7% of its portfolio held in fossil fuel investments. Small beer, of course, but the Rockefeller Brothers’ move was highly symbolic, and, crucially, US SIF’s numbers don’t even include these recent developments since their data is through January 2014.

The wish to “do no harm” drives this modern investor sentiment, of course, but investors and publicly-traded companies are increasingly following the “act responsibly” ethos for defensive reasons. Consider the garment factory building that collapsed in April of 2013 in Bangladesh’s Rana Plaza, killing more than 1,100 workers. After the building collapsed, hundreds of thousands went on strike, bringing production in the region to a standstill. “It was a terrible tragedy,” Woll says, and investors dumped the companies who relied on suppliers working in the collapsed building. Among them were Wal-Mart Stores and JCPenney; their shares fell 1.3% and 1.7% respectively on the day. So public companies are pro-actively and increasingly trying to implement socially-responsible trading standards, simply to protect themselves from such reputation-damaging tragedies.

It’s just one example of what Woll imagines in the future, when environmental, social and governance issues will all be consciously and routinely included as basic criteria at the start of the investment process. “ESG is becoming a new standard for thoughtful money-management firms,” she says.

In other words, roll your eyes or embrace it, socially-sensitive investing is here to stay and a powerful force in today’s market.


This article has been reproduced with permission from Barron's.