By Graham Sinclair
Just in time for Matt Damon's new blockbuster, "The Martian," this week NASA announced there's liquid water on Mars. But not a lot. In sustainable investment, US$6.2 trillion is a tsunami of money, but it's not enough. Today trillions of dollars are being managed with 'sustainability inside,' based on self-reported, unverified, voluntary disclosures by investors globally. For many in the investment industry, it's both inspiring and a little bewildering. The number keeps growing, but what’s in the number is not exactly clear.
Sustainable investment can be defined as “an approach to investment in any asset class where environmental, social and governance (ESG) factors are proactively integrated at any stage of the investment lifecycle” (@SinCoESG 2014). In the last decade of making the investment case for sustainability, the quality and quantity of ESG in investment practice has increased. How big? There’s a few ways to describe it.
In the USA alone, the industry trade group U.S. SIF Foundation research with Croatan Institute, Report on US Sustainable, Responsible and Impact Investing Trends 2014, counted “sustainable, responsible and impact (SRI)” investment at US$6.2 trillion in U.S.-domiciled assets at Dec. 31, 2013 by 480 institutional investors, 308 money managers and 880 community investment institutions, making up about 18 percent of US$36.8 trillion professionally managed assets tracked by Cerulli Associates, a data aggregator.
In early September 2015, over 1,000 investors and their advisors met in London for #PRIinPerson 2015. The Principles for Responsible Investment (PRI) counts 286 asset owners (like pension funds, family offices, foundations and endowments) and 905 investment managers (from majors like Blackrock to boutiques like Futuregrowth) with US$59 trillion assets under management (AuM). At the PRI launch in 2006 at the NYSE the original cohort included $4 trillion AuM. An alternative view, using just the lens of carbon footprinting, US$95 trillion AuM by 822 investors in aggregate is signed on to CDP investor support letters.
Other measures of sustainability in investment may be gauged with alternative initiatives and market sizing: Bloomberg ESG reported customers using ESG data increased 76 percent in 2014. The number of portfolios and the size of assets being managed has increased. But it is also fair to say some of this reported growth is market re-sizing attributable to improved measurement of the self-reporting market participants. Not every cent of every dollar reported to PRI or CDP or US SIF by money managers has sustainability inside. As Volkswagen so dramatically chose to remind us in #DieselGate, anything self-reported or self-regulated may be fraudulent. Let’s keep an asterisk at the end of these big numbers (US$6.2* trillion), to remind us of the self-reported, unverified, voluntary, mixed methods reporting. Greenwashing (false environmental claims like “green SUV” or “clean coal”) and bluewashing (ditto while wrapped within UN-type initiatives like the UN Global Compact) is real and happens.
In fact as ESG demand growth from individuals and institutions may encourage more firms to "put lipstick on the pig and get it out the door", inflating their sustainability credentials. It is a sober reminder we need in the week after the promises of the Sustainable Development Goals lightened up the news cycle, The Late Show and the UN Manhattan headquarters. Trillions of dollars are today invested in the sustainable investment theme. As the regular culling of PRI signatories attests, investment firms are not above signing up then failing to show up. The ESG strategies, technologies, intentions and impacts differ. Most are making best efforts, but others are faking it. Or “Doing a VWdiesel” (too soon?!). Trust but verify.
The trillion dollar numbers in sustainable investment are new, and impressive. But like filming celebrities at a movie launch instead of taking it all in, it was not always so. For the general investing public in the largest investment market, the first available collective investment scheme was the mutual fund Pax World Fund, launched in the U.S. on August 10, 1971 with $101,000 in assets. Today, while the big number is the market of self-reported ESG integration, a niche of investment portfolios put “sustainability” on their labels.
Increased demand and reduced costs of investment data has seen growth in branded sustainability investments, for example Pax Global Women Global Index Fund or RobecoSAM Water Fund. The increased product supply means financial planners and asset allocators needed third party guidance on funds, dodging the pain of their own detailed due diligence. In 2015 the investment portfolio monitoring firm Morningstar rolled out fund-level ESG ratings using data by Sustainalytics, one of the global majors in ESG ratings, headquartered in The Netherlands. Former UBS brand Julius Baer, now a standalone private bank, will be the first client to license the ESG scores for its own funds research. At the end of September, France announced it has rolled out a SRI label.
I have my doubts about how to interpret the sustainability footprint when a multitude of ESG factors is distilled into one rating: many issues in each company rolls up into many issues in a portfolio. Like all investment decisions, it wraps into one rating or score. The tyranny of decisions lies in simplification. Make no mistake, the appeal of the simplification is undeniable. But is the ESG of your portfolio like the color you’re left with when your toddler mixes all the colors of PlayDoh into one big ball? It is unclear how Morningstar will cover these internal dynamics and portfolio mechanics.
Sustainable investment is an evolving field, with innovations being added like social impact bonds (SIBs) since 2008 or labelled “green bonds” since 2007 (see TriplePundit, Sept. 29). Our experience shows that even the best investment firms, while having good key investment disciplines and departments, struggle to integrate ESG factors and develop sustainability factors where the culture and resources are misaligned.
The growth in sustainable investment is significant. But as Marketplace's Kai Rysdal would say, let's not cue up the "happy music". The growth in sustainable investment is substantive, yes, but it overstates matters to say this advanced form of investment is the “new normal”. In general, most investors or businesses or governments do not talk and act as if the low-carbon economy is inevitable, irreversible, and irresistible. For a useful recap, watch the 2 Degrees Investing Initiative carbon metrics day from May 2015 in Paris. The reality is that investors continue to invest as if 2 degrees Celsius will have no effect. In reality we should expect 6 degrees Celsius.
We have more information flowing, but are firms on track? CDP reported “[s]eventy-eight per cent of the largest 500 publicly listed companies now report their carbon emissions" in 2015. Investors are starting to make their portfolio companies count their externalities. But none of these are being mapped to the goal of zero emissions. Mark Carney, the Bank of England leader described how climate change can affect financial stability in a watershed speech at Lloyds of London on 29 September 2015. Bottom line: “A framework for firms to publish information about their climate change footprint, and how they manage their risks and prepare (or not) for a 2 degree world, could encourage a virtuous circle of analyst demand and greater use by investors in their decision making." How long until all investors (and all their portfolio companies) invest every cent toward a 2 degree horizon?
US$6.2 trillion is not enough -- especially if every one of TriplePundit’s loyal readers cannot in this moment be sure their money is investing as if the future matters. Sustainable investment needs your voice as a client. Have you asked your investment advisor where your money is invested, and what process is used to get there? Every cent needs to be invested on the 2C vector. "Send the right signals" was the consistent refrain in keynote speeches at the PRI event from both HRH Prince Charles (Princess Diana’s ex-husband) and the CEO of Pimco, one of the largest fixed income investment managers. Having investors back an initiative can have real results. From a small base, sustainable investment continues to grow. And grow. We need more.
Image credit: NASA