What is the most successful green market in the U.S. in terms of both market share and volume? No, it’s not organic food and definitely not hybrid cars or clean energy. It is socially responsible investing (SRI).
According to a new report, more than one out of every nine dollars under professional management in the U.S. is invested today according to strategies of sustainable and responsible investing (SRI). The overall total of SRI assets is $3.74 trillion.
Released by the US SIF Foundation, the 2012 Report on Sustainable and Responsible Investing Trends in the United States is not just an incredible source of data on the latest SRI trends, but also a door to an alternative universe, where investors are no strangers to sustainability.
What do I mean by that? Well, we usually hear about the lack of interest of investors, fixated on short-term results, in sustainability. At the last BSR conference, for example, 24 percent of the participants said investor disinterest is the greatest barrier to wider uptake of sustainability among companies. Yet, this report provides hard core data on the growing levels of interest among the investment community in sustainability factors and how investors increasingly integrate ESG criteria in their decision-making process.
So how significant is this alternative universe? How fast does it grow? What’s driving it and is it enough to push the whole economy forward? Let’s try to answer these questions one by one.
The growth of SRI
Under the term SRI, the report includes investors that apply various environmental, social and governance (ESG) criteria in their investment analysis and investors or money managers that filed or co-filed shareholder resolutions on ESG issues at publicly traded companies. After eliminating double-counting for assets involved in both strategies, the overall total of SRI assets is $3.74 trillion, a 22 percent increase compared to the last report released in 2010.
If you look at the two components, most of the growth comes from the first component – ESG incorporation: $3.31 trillion in 2012 compared to $2.55 trillion in 2010 (30 percent growth). The second component, shareholder resolutions grew only two percent in the last two years – from $1.5 trillion in 2010 to $1.53 trillion in 2012.
It’s impressive to see not just the growth in the last two years (22 percent), but also the overall growth from 1995, when U.S. SIF Foundation first measured the size of the U.S. SRI market – 486 percent. For comparison, the broader universe of assets under professional management in the U.S has grown 376 percent during these years.
First, let’s have a look at the leading ESG issues that money managers incorporate across various types of funds and separate accounts. The 10 top ESG issues (in terms of the total assets that incorporate them) are: Sudan-avoidance policies, general governance, tobacco, alcohol, labor, military/weapons, gambling, climate change/carbon, pornography and human rights. Social criteria are the most prominent in asset-weighted terms, incorporated in the management of $1.2 trillion across a wide range of 622 investment vehicles, followed by governance ($623 billion) and environmental ($240 billion) criteria.
No less interesting is the question of why investors apply ESG criteria. According to the report, among the subset of 129 managers that responded to the survey on their reasons for incorporating ESG criteria, the top motivations were meeting client demand and fulfilling mission or values (72 percent each), followed by social benefit (67 percent), risk (67 percent), returns (64 percent), fiduciary duty (53 percent) and regulatory/legislative (22 percent).
These results indicate that the growth in the use of ESG criteria is very much demand-driven. We also see that this trend is still more values-driven from the fact that fulfilling mission and social benefits play a more important role than risk and return. Finally, we should pay attention to the G- governance criteria such as executive pay, board issues, political contributions and broader policies on corporate governance that are on the rise.
The significance of SRI
SRI is one of the most powerful trends in the sustainable business space. Why? Because money talks, as the cliché says, and companies listen to it, many times much more than they listen to anything else. The result is that shareholders have the power to make companies pay attention to environmental and social issues that no other stakeholder group possesses, and therefore SRI has a potential to shake and change not just the asset management industry, but the economy as a whole. The more interesting question, though, is to what degree SRI can fulfill its potential, which brings us to the final point.
Can SRI push the economy forward?
The answer is probably, “Yes, but it needs to scale up first.” We have to remember that SRI still represents only 11.3 percent of the U.S. financial market, which is actually a little bit less than 2010, where it represented 12.2 percent of the market. This is not enough to move the needle and move it fast – we need to see SRI scaling up and reaching at least 25-30 percent of the market. Until then, while investors will keep showing increased interest in ESG, the vast majority of them will continue to be motivated by short-term results, not sustainability. To “build a sustainable and equitable economy” we need SRI to scale up and fast.
Raz Godelnik is the co-founder of Eco-Libris and an adjunct faculty at the University of Delaware’s Business School, CUNY SPS and the New School, teaching courses in green business, sustainable design and new product development. You can follow Raz on Twitter.