Driven by ever-increasing investor demand, most major investment institutions are practicing sustainable, responsible, and impact (SRI) investing. As a result, the number of products claiming to integrate environmental, social, and governance (ESG) criteria continues to rise.
Per Morningstar®, there are now more than 600 ESG mutual funds and exchange-traded funds in the U.S., including 87 added in 2022. These funds saw net inflows of more than $3 billion last year. We continue to scrutinize and rate these new entrants, and while many are from mainstream firms with weak ESG standards, we know there may be gems out there.
The Securities and Exchange Commission (SEC) released two proposals in 2022.
In other developments, last year the SEC released two potential rules to prevent misleading or deceptive fund names and to require more detailed ESG disclosure by funds and financial advisors. These proposals, though not yet approved, are already causing the “pretenders” to reclassify and reduce their stated ESG offerings. The result will ultimately enhance the rigor of the field by narrowing the definition of what qualifies as an ESG investment.
The SEC also initiated rare ESG enforcement actions in 2022.
The SEC fined Goldman Sachs $4 million for failing to follow its policies and procedures involving ESG investments. It also fined BNY Mellon $1.5 million for misstatements and omissions about ESG considerations. These may be small fines in Wall Street terms, but they are symbolically important in efforts to restore the integrity of the field.
Since “greenwashing” is rampant in the investment sector (and in many other sectors of the economy), we created the Heart Rating more than 30 years ago. It helps investors distinguish between the novices and experts. Words like sustainable, responsible, and impact are quite subjective, and while the SEC hasn’t yet chosen to define these terms, the Commission is nevertheless making sure that firms utilizing the terminology back up their words with clear procedures and criteria.
The pushback from conservative state political jurisdictions is surely a response to the mainstream popularity of ESG investing.
States like Texas and Florida are preventing large money managers with ESG policies from doing business, and falsely characterizing ESG investing as having an anti-capitalist, liberal “woke” agenda. ESG is in fact a widely embraced, apolitical financial risk management process practiced by most investment firms. Research and performance metrics make the business case for it as just and sustainable capitalism. But facts don’t always reign supreme in the political arena.
For example, Kansas Attorney General Kris Kobach, a conservative Republican, stated a conflict that does not exist in a recent Associated Press article: “The agent who is representing or investing on behalf of the principal has a fiduciary duty to put the principal’s interest over the agent’s interest.”
ESG decisions are not made against the interests of investors; they are based on financial analysis. Efforts to restrict this – as this and other AGs are attempting – interferes with the freedom of investment professionals to adhere to their fiduciary responsibility, politicizing it unnecessarily since there is nothing political involved in the process.
Despite negative stock and bond market returns in 2022, Natural Investments’ assets under management remained nearly level from 2021, as we brought in more than 80 new clients with $77 million in assets during the year.
If you’re new to NI, welcome to the family. We thank those of you who’ve stayed the course with us over the decades as we’ve collectively illustrated the capacity to make money and to make a difference. We are pioneering the strategies responsible for mainstream acceptance of ESG investing today.
This year’s impact report highlights the important work we are doing together to make our economic system more resilient, just, and regenerative. Now in our 38th year of managing investor assets, we appreciate your enduring commitment to this transformation of society and our economy.
