The Biennial Report on US Sustainable and Impact Investing Trends, which measures the state of the industry at the end of 2019, shows that sustainable, socially responsible, and impact investing (SRI) is on its way to becoming the new normal. Since the previous report two years ago, the amount of assets under professional management in the US that integrates some form of environmental, social, and governance (ESG) criteria jumped 43% to over $17 trillion. Not only is this the largest two-year increase in 25 years of reporting, but the total suggests that one of every three dollars of professionally managed investments is invested using SRI criteria.
There are now about 400 money managers practicing SRI and more than 500 institutional investors (such as pension plans, government treasuries, and university and foundation endowments) applying various ESG criteria as a matter of investment policy. More than 1200 community development financial institutions provide capital to people and communities in need of basic banking services, loans, and access to credit.
In the public markets, the most popular environmental, social, and governance issues addressed through portfolios are climate change and carbon risk, tobacco, sustainable agriculture, operations in oppressive regimes, natural resource management, executive pay, and board governance. In the realm of shareholder engagement, hundreds of proposals by institutions managing $2 trillion in assets were submitted in the past two years, with corporate political activity continuing to be the issue of greatest investor concern given the potential reputational risk to companies. Fair labor and equal employment opportunity, including gender pay equity, were the next most popular area of advocacy, followed by climate change.
Attempts by the Trump administration to stifle SRI precisely at a moment when its popularity surged demonstrate that responsible investing has become a significant threat to entrenched corporate interests practicing an exploit-at-will form of capitalism.
The SRI industry has developed a strategy in response to new rules authored by the Securities and
Exchange Commission (SEC) and the Department of Labor (DOL); the rules seek to limit the use of SRI in 401(k) plans and raise the amount of money shareholders need to hold of a stock in order to file resolutions with companies. The response includes 1) strategic engagement of Congressional leadership to use the Congressional Review Act to overturn these rules within the first month of the next presidency, and 2) a call to action by the incoming administration to reverse the new rules via the normal agency rulemaking procedure as part of a larger effort to legitimize responsible business practices.
In one of my last acts as a board member of US SIF (my 3-year term expired at the end of 2020), I contributed to a transition document for the incoming administration. Entitled “Toward a Just and Sustainable Economy,” it recommends that the President create a White House Office of Sustainable Finance and Business to advance the continued growth of sustainable investing and accelerate the shift through all government contracts and regulatory bodies from a shareholder-centric company model to a multi-stakeholder model that also benefits employees, communities, and the environment.
The paper recommends that appointees to and leaders of various departments at the SEC and DOL are
knowledgeable about sustainable investing. The association recommends the establishment of a new sustainable investment advisor position in the office of the SEC Chair to work collaboratively with an external advisory committee that would provide guidance and recommendations on current SRI trends, including the reversal of regulatory actions that hinder the use of SRI products and limit shareholder proposals. It also recommends that regulators mandate public company reporting of ESG issues so investors can make informed decisions. We also recommend the establishment of a sustainable finance liaison for the Environmental Protection Agency and encourage the administration to require the Federal Reserve to join the Network for Greening the Financial System, a group of central banks that share best practices on managing climate/environmental risks and guide their national economies toward more sustainable development practices.
Other recommendations in the document include: a requirement for the federal employee retirement plan to make socially responsible mutual funds available; the appropriation of at least $1 billion a year to community development financial institutions; an increase in the minimum wage to $15/hour and mandated paid sick leave; an end to fossil fuel subsidies; the integration of environmental justice in climate crisis solutions; and a reversal of recent regulatory changes to the Clean Air Act, Clean Water Act and National Environmental Policy Act.
Undoing the damage of the past four years will take time, but the SRI industry has defined a clear path forward for getting the financial industry back on the course to contribute to a more just and sustainable society. That opportunity is now before us.
