(September 3, 2013) — Responsible investing is rising in popularity, with $3.74 trillion in US assets now invested in socially-responsible investing (SRI) and environmental, social and governance (ESG) strategies.
According to a Commonfund Institute white paper, “From SRI to ESG: Changing the World of Responsible Investing” by John Griswold, William Jarvis, and Lauren Caplan, 11.2% of the $33.3 trillion total managed assets in the US are now invested in this way—a 22% increase from the $3.07 trillion in 2010.
The study also found that investors are no longer just applying a SRI strategy on its own, arguing that using negative screening alone is too restrictive for today’s institutions. This, the report said, has led to a growth of ESG integration.
ESG is a much broader study—intended to improve investment performance by using resources to integrate factors, such as energy efficiency, carbon emissions, workplace safety, and corporate governance into basic investment analyses.
Various US institutional investors have acknowledged the importance of ESG, including state pension funds—the New York State Common Retirement Fund, the California Public Employees’ Retirement System, and the Connecticut Retirement Plans and Trust Funds.
Nonprofit organizations also commonly use ESG. The 2012 NACUBO-Commonfund Study of Endowments (NCSE) reported that 18% of the 831 responding US higher education institutions considered at least one ESG criteria. Of the 18%, 59% said they hired managers who would incorporate ESG criteria into their portfolio.
A separate Commonfund study on private foundations also found 17% of US private foundations used ESG.
There remain two big concerns in ESG investing, outlined in the white paper: first, there is no standardized system of ESG analysis, making it difficult for investors to compare investments and; second, the long-term nature of ESG risk factors makes the strategy less desirable to certain investors.
The study states that alternative investments—hedge funds, private equity, venture capital, real estate, etc.—have a harder time adopting ESG methods due to their “opaque” approach to investing. To overcome the difficulty, private equity firms have adopted targeted ESG funds, such as KKR’s Green Portfolio Program.
Hedge funds are also researching ways to use ESG factors in strategizing short sales of securities and the use of derivatives, as they meet more investors with interests in ESG.
Despite these challenges, many countries outside of the US have already adopted legislations requiring ESG consideration.
The UK Pensions Act (2000) compels pension funds to disclose sustainability factors in portfolio construction, Germany emphasizes the use of sustainability as part of the fiduciary’s duty, and in France the law requires public pension funds to reveal how their investment policy concerns ESG issues.
The global move towards responsible investing is also gaining strength as more investors and managers acknowledge that ESG strategies are not “all-or-nothing”, the report said.
The UN Environment Programme Finance Initiative concluded in 2006 that as long as ESG factors are considered within a realm of a practical sense, ESG can “form part of the investment decision-making process”—even becoming “a routine part of all investment arrangements.”
The full paper can be found here.
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Sage Um
Assistant Editor, aiCIO
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