Sustainable Investing – Who is Driving Its Growth?

By Karalyn Carlton June 1, 2018

The percentage of S&P 500 companies reporting their sustainability efforts increased from just 20% in 2011 to 82% in 2016. 1 Today that number exceeds 85%!

The increase is extraordinary. Consider that Morningstar®, the company recognized for developing the well-utilized investment rating system, recently introduced its Morningstar Sustainability Ratings. This was created to help evaluate how individual mutual funds and ETFs are meeting sustainable practices.

Responsible investing has entered the mainstream. It is no longer considered a "new age" phenomenon, but a well-established and growing investment choice. Here are some statistics:

$8.72 trillion in assets in the U.S. 2
$1 of every $5 under professional management in the U.S. 2
More than 1,300 ESG strategies in the U.S. 2
Globally, more than 11,000 public companies report on ESG factors 3

So, who is driving the growth?

Consumers, investors, companies, public pension plans, college endowment plans and investment managers can all take credit for the growth of and interest in sustainable investing.

In 2017, 32% of HNW (high net worth) investors were interested in impact investments – up from 22% in 2015.

Large numbers of investors, particularly two groups that are becoming more prominent—women and millennials—consistently indicate they are highly interested in sustainable investing. 4 It is estimated that these emerging investor groups could soon control upwards of $30 trillion in assets in the United States alone. 6

Company leadership is becoming fast aware that their choices in governance issues matter and the need to be more transparent is critical.

There is a premise that companies that are not having corporate time and resources drained by lawsuits perform better for investors. This is now on the forefront of risk management and the due diligence efforts by many investment managers. If an investment manager is looking to invest in one of two similar companies in the same industry —one that adheres to sustainable practices and one that does not —the manager will more than likely invest in the former than the latter. It is simply a risk management decision.

It is said that if you can't measure something, you can't change it. The Sustainable Development Goals (SDG) initiative has identified 17 priority areas in which they could have the greatest impact. PIMCO is one company engaging with corporate issuers (see graph). Some investment companies, especially the Environment, Social and Governance (ESG) oriented entities, are taking an advocate role with corporate issuers. This involves bringing players to the negotiating table to communicate the desired change in the companies' practices in order to be considered for investment.

While interest and the growth in sustainable investing are rising, it is important to acknowledge impact can be subtle. Progress is nuanced. Some companies may embrace one aspect of ESG, for instance gender diversification on its board, yet be unwilling to change another aspect (such as environmentally responsible raw material sourcing). For those companies and investors that have embraced these mandates, the next phase of sustainable investing will be understanding and quantifying the impact the company/investment has made.

This growing area is one that is generating more and more interest. If you have questions, please don't hesitate to contact me.

1 Governance & Accountability Institute Inc., "FLASH REPORT: 82% of the S&P 500 Companies Published Corporate Sustainability Reports in 2016," May 31, 2017.

2 US SIF Foundation. Report on US Sustainable, Responsible and Impact Investing Trends 2016.

3 Bloomberg Impact Report Update (2015).

4 U.S. Trust. 2014. "Insights on Wealth and Worth"; Morgan Stanley Institute for Sustainable Investing. 2015. "Sustainable Signals: The Individual Investor Perspective."

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