Every two years, US SIF, the trade organization for the sustainable investment industry, publishes a report that tracks asset growth and other themes. This year, it reported that assets sprang 42% higher than in 2018, and that a staggering one-third of assets in the U.S. is now managed according to sustainable principles.
But that isn’t enough, the trade group says. Barron’s checked in with Lisa Woll, CEO of US SIF, and Meg Voorhes, director of research, about the widely watched survey and what happens next in the world of environmental, social and governance, or ESG, investing.
The following conversation has been edited.
Barron’s: What was most significant about this year’s findings?
Voorhes: We’re seeing one in three dollars professionally managed with ESG criteria in some way. I’m struck by the higher levels of support that shareholder proposals are receiving on environmental and social issues. [In the past] a lot of money managers would have deferred to management.
But at the same time, we have this large pool of assets where we couldn’t determine exactly what were the numbers and types of funds involved. We had reports from money management firms that they consider ESG across the broad spectrum of their assets, but we didn’t get a breakdown of those funds. I’d love to see more detailed reporting.
Do you expect there to be more standardization in terms of ESG disclosure by the funds themselves?
Woll: Certainly for funds that do work internationally, in Europe, because of the sustainable finance plans across the EU and the UK. With the new administration, there are proposals being floated around ESG disclosure by companies and better transparency by portfolio managers as well. I’d expect that in the next two to three years, we’ll absolutely see more calls for standardization around descriptions, either through government, or more likely through groups like ours and the CFA Institute and others looking at this.
Doesn’t this kind of growth raise even greater concerns about greenwashing, or pretending to be more sustainable than you actually are?
Voorhes: When we ask managers why they’re looking at ESG factors, the top reason has been client demand. Money managers know that to be competitive, they need to develop some expertise.The idea of ESG integration is becoming more popular and accepted but may be a little harder to describe. Which ESG factors are material by sector and industry? It’s a little hard to report out. So we don’t get a whole lot of specifics. I can see why people are concerned that a lot of new entrants aren’t describing in great detail what they’re doing.
Let’s talk about the new White House. What are the biggest ESG issues confronting the new administration?
Woll: Today, we see an overlapping of the Covid-19 pandemic, injustice and climate change, and economic inequality. That forms a framework for our policy recommendations. One, there’s an opportunity to get principals at important agencies that actually know something about sustainable investment, who are interested and supportive. Two, that they understand the use of ESG data. Three, they understand the relationship of the utilization of ESG criteria and proxy voting to fiduciary duty. There will be an opportunity to reverse the rulemaking at the Securities & Exchange Commission and the Dept. of Labor and for regulatory rollback across the whole range of climate-related initiatives.
Clearly the [incoming] administration has made climate change and addressing environmental justice issues a priority. We came out in support of a minimum wage of at least $15 per hour as well as paid sick leave. Our leading recommendation is ensuring that companies have a broader focus than short-term shareholder returns. I call it multi-stakeholder management.
We have recommended that the new administration create a White House Office of Sustainable Finance and Business. Let’s say someone at the SBA wants to introduce sustainable investment or stakeholder capitalism to the folks they work with, then an office at the White House could provide an enhanced resource.
The Dept. of Labor recently approved a rule limiting the ability of 401(k) retirement plans to offer sustainable investments. Won’t that limit the growth of sustainable investing in the U.S.?
Woll: There are two things we want to do. First, go to Congress to change the Employee Retirement Income Security Act, to make clear that the duties of an ERISA fiduciary include using ESG criteria and undertaking proxy voting. This has been a political football for some time and it’s not a good way to run a railroad. So there needs to be a legislative response. At the same time, we will work to have a new rule by the DOL on the utilization of ESG criteria. It will be hard to move the sustainable investing field if we can’t use retirement plans because, for the majority of Americans, this is one of the only places they have significant assets. We need some of these lingering issues around fiduciary duty in our retirement plans and ESG resolved.
You do this report every two years. What would you like to see happen between now and the next publication?
Voorhes: I’d like to see more disclosure and more detail than a lot more growth. Saying that sustainable investing represents 33% of the total of the universe of professionally managed assets in the U.S. is terrific. But we want to get more information. That’s me as a research geek saying,”Hey, before we bring in a whole lot more growth, let’s have better reporting.” That would help allay these concerns that some of the sustainable investing isn’t real, that it’s a Potemkin village. Obviously the public, the potential clientele of these investment firms, would like to see that detail.
Woll: The need for fundamental financial literacy is significant in this country. People [who] say, “Oh yes, I want to be a sustainable investor” [and] who don’t even know what it means to be an investor, period. We launched a retail course, for individuals, which is critical.
A great thing would be, two years from now, if we knew thousands of people had taken this course.
Thank you very much.
Write to Leslie P. Norton at [email protected]