Money managers become unlikely activists

If you are looking to save the environment, address racial or gender discrimination, fight for human rights or tackle corruption, it looks like you have some unlikely allies: Money managers.

Do not scoff. The biennial Report on U.S Sustainable, Responsible and Impact Investing Trends is out, and the numbers are eye-popping.

There is now US$12 trillion being managed in the U.S. with an eye to Environmental, Social and Govern- ance (ESG) criteria, accordingto the report by the u.s. SIF, a non-profit hub for sustainable investing. That is up 38 per cent in just two years, from US$8.7 trillion in 2016.

To put that in perspective, more than one in four dollars — or 26 per cent of the US$46.6 trillion in total U.S assets under professional management — consider ESG factors in investment selection.

That is hardly a “niche” investment approach — and seems it is not going away anytime soon.

“I’m struck by the fact that we are seeing growth across all types of investment vehicles, asset classes and styles of investing,” says Meg Voorhes, US SIF’S research director. “ESG is becoming accepted practice — part of investors and money managers simply doing their jobs.”

So what specific factors are driving Esg-oriented investment strategies? The reason most often cited by money managers was climate change, with US$3 trillion in assets being steered with that issue in mind; followed by tobacco (US$2.89 trillion), conflict risk such as repressive regimes (US$2.26 trillion), human rights (US$2.2 trillion), and transparency (US$2.2 trillion).

Institutional investors noted a similar list — repressive regimes, tobacco and climate change were their top three — while also paying keen attention to governance, such as board issues (US$1.73 trillion) and executive pay (US$1.69 trillion).

“What I find fascinating is that 20 years ago, the corporate community was way ahead of the investment community on ESG,” said Robert Eccles, visiting professor of management practice at Oxford University’s Said Business School, and one of the world’s foremost authorities on the subject.

“That has flipped over the last five years. Investors are noticing that companies which do better on ESG issues, have better financial performance. The evidence just continues to accumulate. This stuff matters.”

Indeed, the report found that what is driving ESG investment is not some fuzzy interest in social justice. It is, not surprisingly, self-interest: Money managers are responding to client demand, as well as seeking to improve returns, minimize risk and fulfil their fiduciary duty.

Of course it is one thing to be concerned by environmental or social issues, and another to actually do something about it. In the investing world, that often takes the form of peppering a company’s management with shareholder resolutions.

The US SIF report found that from 2016 through the first half of 2018, 165 institutional investors and 54 investment managers controlling a total of US$1.8 trillion in assets filed shareholder resolutions on ESG issues. The subjects ranged from proxy access (the ability to nominate directors), to climate change, to corporate political spending.

“Many of these money managers and institutions, concerned about racial and gender discrimination, gun violence, and the federal government’s rollbacks of environmental protections, are using portfolio selection and shareowner engagement to address these important issues,” the report’s authors write.

The Sustainable Development Goals (SDGS) ratified by the United Nations in 2015 sparked investor interest in ESG, says Eccles. Within that framework, data collection has been improving, data providers have been multiplying and investors now have more measurables to work with.

“It’s the closest thing Earth has to a strategy ,” says Eccles. “You can’t go to an investor conference these days, without a panel on SDGS.”

The most obvious conclusion to be drawn from the US SIF report: The ESG investing trend shows no sign of going away.

Since the organization began tracking these data in 1995, total assets using ESG principles in investment selection have ballooned 18-fold.

Which is why some of the world’s most powerful activists might not be out riding a dinghy for Greenpeace — but sitting in corporate boardrooms, deciding where to allot the trillions of dollars they manage.

“If investors are concerned about things like climate risk and diversity, they should feel validated by this report,” says US SIF’S Voorhes. “Because it turns out a lot of money managers and institutional asset owners are thinking about this stuff, too.”