by the Social Investment Forum
Every few years a very exciting report comes out on the sustainable and socially responsible investing (SRI) industry. It covers the scope of SRI in the U.S. including ESG incorporation, shareholder advocacy, and community investing. Before we reveal the Trends Report’s positive findings it is helpful to understand the definitions of SRI used by the Social Investment Forum, the national trade association for the socially and environmentally responsible investing industry, who released the report in November:
Sustainable and Socially Responsible Investing Defined
Socially responsible investing is an investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact. Traditionally, responsible investors have focused on one or more of three strategies: ESG incorporation into investment analysis and portfolio construction, shareholder advocacy, and community investing. SRI practitioners include asset managers, investment advisors and asset owners. Among the owners of investment assets, both individual and institutional investors are actively involved in SRI strategies, and the types of institutions taking ESG matters into account range widely: from foundations and endowments to hospitals and healthcare plans, from state and local funds to private corporations, from faith-based institutions to other nonprofit organizations.
There is no single approach to or motivation for socially responsible investing. Some investors embrace SRI strategies to manage risk and fulfill fiduciary duties. Others are driven by their personal values, their institutional mission, or the demands of their clients, constituents or plan participants. Some are seeking hidden sources of alpha (financial out performance); others are seeking long-term sustainable social and environmental impact. Many institutions and individuals mobilize SRI strategies for complex reasons.
Just as there is no single approach to SRI, there is no single term to describe it. Depending on their emphasis, investors use such labels as: “sustainable investing,” “responsible investing,” “impact investing,” “mission-related investing,” “ethical investing,” “values-based investing” and “green investing,” among others. To reflect this diversity of terminology, this report uses the terms sustainable investing, socially responsible investing and SRI interchangeably.
Far from being a static enterprise, SRI is an evolving form of finance, and the proliferation of approaches underscores this basic dynamism. As the United Nations Principles for Responsible Investment have highlighted, “[t]here is a growing view among investment professionals that environmental, social and corporate governance issues can affect the performance of investment portfolios.”. As an investment discipline, SRI strategies can be mobilized across asset classes within portfolios, and increasingly investors are applying ESG investment techniques not only to public equity investments, but also to real estate and alternative investments, such as private equity and venture capital.
What unites these diverse investment approaches—and what ultimately distinguishes them from the broader universe of assets under management in the United States—is precisely the explicit incorporation of ESG issues into investment decision-making, fund management or shareholder activities. The specific ESG factors and the way they are used may differ widely from investor to investor, and tactical and technical considerations are often specific to an institution or fund manager. But the basic strategies of SRI share sufficient features to be observed and measured. This report therefore seeks to quantify these various forms of strategic sustainable investment behavior, across the diverse terms that investors may use, the tactics they apply, and the motivations for their involvement.
Socially Responsible Investing Strategies
Socially responsible investing strategies work together to promote responsible business practices and help provide social and environmental benefits across the economy.
ESG INCORPORATION involves the application of explicit environmental, social and governance factors into the investment process. In sustainable investing, asset managers frequently complement traditional, quantitative techniques of analyzing financial risk and return with qualitative and quantitative analyses of ESG policies, performance, practices and impacts.
As an investment discipline, ESG incorporation can be a process of identifying and investing in companies that meet certain standards of corporate social responsibility (CSR) or that reflect the values or mission of the investor. According to the Sustainable Investment Research Analysts Network (SIRAN), a working group of Social Investment Forum members, “CSR includes issues such as environment, health and safety, diversity and human resources policies, and human rights and the supply chain.” SRI can involve evaluating and benchmarking companies on CSR issues, analyzing corporate social and environmental risks, constructing portfolios using ESG issues, or engaging corporations to improve their CSR policies and practices .
Consequently, asset managers and asset owners may incorporate ESG issues into the investment process in a variety of ways. Some may screen their portfolios by excluding or avoiding companies with poor CSR track records or by positively filtering a portfolio for companies that have stronger CSR policies and practices. Others may incorporate ESG factors to benchmark corporations to peers or to identify “best-in-class” investment opportunities based on CSR issues. Still other responsible investors integrate ESG factors into the investment process as part of a wider evaluation of risk and return.
The survey of asset managers conducted for this report asked respondents to describe their approach to ESG incorporation in portfolio management. Although negative screening on ESG issues (particularly related to issues such as the genocide in Sudan) continues to predominate among both asset managers and owners, numerous managers are also positively screening portfolios, identifying best-in-class attributes, fully integrating ESG factors into investment management, or making thematic investments, for example, in clean technology or workplace diversity.
SHAREHOLDER ADVOCACY involves actions sustainable investors take as asset owners. These efforts include communicating with companies on ESG issues of concern. For owners of shares in publicly traded companies, shareholder advocacy can also take the form of filing and co-filing shareholder resolutions on ESG issues and actively voting their proxies in support of such resolutions. Proxy resolutions on ESG issues generally aim to improve company policies and practices and to promote the long-term concerns of shareholders and other stakeholders. Some sustainable investors also speak out for legislative and regulatory changes that will lead to greater corporate accountability and disclosure on ESG issues.
COMMUNITY INVESTING directs capital responsibly from investors and lenders to communities that are underserved by traditional financial services. It provides access to credit, equity, capital and basic banking products that these communities would otherwise lack. In the United States and around the world, community investing makes it possible for local organizations to provide financial services to low-income individuals and to supply capital for small businesses and vital community services, such as affordable housing, child care and health care. In recent years, the term “impact investing” has gained currency as a broader term to encompass community investing and other investments—mostly through private placements—in businesses that create social or environmental benefits alongside financial returns. Many SRI practitioners assert that community investing (and impact investing) does not represent a separate strategy of SRI so much as an array of alternative asset classes that merit consideration for inclusion in many investors’ portfolios.
EXECUTIVE SUMMARY OF THE 2010
Sustainable and socially responsible investing (SRI) in the United States has continued to grow at a faster pace than the broader universe of conventional investment assets under professional management. At the start of 2010, professionally managed assets following SRI strategies stood at $3.07 trillion, a rise of more than 380 percent from $639 billion in 1995, the year of the Social Investment Forum Foundation’s first Trends Report. Over the same period, the broader universe of assets under professional management increased only 260 percent from $7 trillion to $25.2 trillion. During the most recent financial crisis, from 2007 to 2010, the overall universe of professionally managed assets has remained roughly flat while SRI assets, as documented in this report, have enjoyed healthy growth.
HIGHLIGHTS OF THE 2010 REPORT
Market Share and Growth of Socially Responsible Investing Assets
The 2010 Trends Report has identified $3.07 trillion in total assets under professional management in the United States that use at least one of three socially responsible investing strategies:
The incorporation of environmental, social and governance (ESG) factors into investment analysis and portfolio construction,
The filing or co-filing of shareholder resolutions on ESG issues, and
Deposits or investments in banks, credit unions, venture capital funds and loan funds that have a specific mission of community investing.
In the last several years, the pool of assets engaged in SRI strategies has grown more rapidly than the overall investment universe due to a number of factors, including net inflows into existing SRI products, the development of new SRI products and the adoption of SRI strategies by managers and institutions not previously involved in the field. Since 2005, SRI assets have increased more than 34 percent while the broader universe of professionally managed assets has increased only 3 percent. From the start of 2007 to the opening of 2010, a three-year period when broad market indices such as the S&P 500 declined and the broader universe of professionally managed assets increased less than 1 percent, assets involved in sustainable and socially responsible investing increased more than 13 percent.
As a result of this growth, nearly one out of every eight dollars under professional management in the United States today 12.2 percent of the $25.2 trillion in total assets under management tracked by Thomson Reuters Nelson is involved in some strategy of socially responsible investing.
The total assets managed under policies that explicitly incorporate ESG criteria into investment analysis and portfolio construction (ESG assets) are valued at $2.51 trillion. Of these ESG assets, $691.9 billion were identified within specific investment vehicles managed by money managers, while at least $2.03 trillion were identified as owned or administered by institutional investors. Of the institutional ESG assets, $206.3 billion were managed through investment vehicles captured in research on money managers.
ESG Incorporation by Money Managers and Investment Vehicles
The assets and numbers of investment vehicles tracked that incorporate ESG criteria rose sharply since the last study conducted in 2007. These assets, excluding the assets of separate account vehicles, increased 182 percent from $202 billion to $569 billion. The number of funds that incorporate ESG factors rose 90 percent from 260 to 493.
US-registered investment companies: Among the broader universe of investment vehicles that incorporate ESG factors into investment management, registered investment companies accounted for $320.3 billion, invested through 281 funds. Registered investment companies consist of mutual funds (including those underlying annuity products), exchange-traded funds (ETFs) and closed-end funds.
Mutual funds: The largest share of funds that incorporate ESG factors are mutual funds, with $316.1 billion in total assets invested in 250 different funds. Of these ESG mutual funds, 27—with $176.9 billion in assets—underlay annuity products.
Exchange-traded funds: Twenty-six ETFs with $4.0 billion in total assets were identified as incorporating ESG criteria. Although ETFs accounted for only 1 percent of the total assets of all ESG investment vehicles, their assets have grown 225 percent since 2007, the fastest of all registered investment vehicles.
Closed-end funds: Five closed-end funds with assets of $202 million were tracked as incorporating ESG criteria.
Alternative investment funds: The Social Investment Forum Foundation was able to identify 177 alternative investment vehicles that incorporated ESG criteria with $37.8 billion in total assets. Alternative investment vehicles include hedge funds, social venture capital and double- and triple-bottom-line private equity funds and responsible property funds, typically organized as unregistered limited partnerships or limited liability companies and available only to accredited institutional and high-net-worth investors. The number of alternative investment vehicles incorporating ESG criteria increased 285 percent since 2007, faster than any other segment of ESG vehicles, while their assets increased 613 percent. Environmental investing criteria related to clean technology and renewable energy and community impact are leading investment themes in alternative asset classes.
Other pooled products: Thirty-five other pooled products with $211.4 billion in assets, typically commingled portfolios managed primarily for institutional investors and high-net-worth individuals, were invested according to ESG criteria.
Separate account vehicles: Among separate account managers, 232 distinctive separate-account vehicles or strategies, with $122.4 billion in assets, incorporated ESG factors into investment analysis.
With $2.3 trillion in assets involved in SRI strategies, institutional investors dominate the SRI universe documented in this report. Of this overall universe of institutional assets engaged in SRI strategies:
- $2.03 trillion incorporate ESG factors into investment analysis and portfolio selection,
- $858.8 billion is controlled by institutions that file or co-file shareholder resolutions on ESG issues, and
- $586.2 billion was identified as involved in multiple strategies of ESG incorporation, shareholder advocacy or community investing.
A wide array of investors now files or co-files shareholder resolutions at US companies on ESG issues, and hundreds of these proposals come to votes each year. From 2008 through 2010, more than 200 institutions— including public funds, labor funds, religious investors, foundations and endowments—and investment management firms filed or co-filed proposals. These institutions and money managers collectively controlled $1.5 trillion in assets at the end of 2009.
Assets in community investing institutions rose more than 60 percent from $25.0 billion in 2007 to $41.7 billion at the start of 2010, reflecting healthy growth in all four categories of community investing institutions that the Social Investment Forum Foundation has tracked since 1999: community development banks, community development credit unions, community development loan funds and community development venture capital funds.
ABOUT THE SOCIAL INVESTMENT FORUM
The Social Investment Forum Foundation is a nonproﬁt 501(c)(3) organization. The objective and purpose of the Foundation is to support the activities and purpose of the Social Investment Forum, its sole member, by assuming the responsibilities for, and the management of, certain educational, research and programmatic activities.
The Social Investment Forum (SIF) is the US membership association for professionals, firms, institutions and organizations engaged in socially responsible and sustainable investing (SRI). SIF and its members advance investment practices that consider environmental, social and corporate governance criteria to generate long-term competitive financial returns and positive societal impact.
SIF’s members include investment management and advisory firms, mutual fund companies, research firms, financial planners and advisors, broker-dealers, banks, credit unions, community development organizations, non-profit associations, and pension funds, foundations and other asset owners. SIF members practice sustainable and responsible investing through methods such as portfolio selection analysis, shareholder advocacy and community investing.
The vision of both organizations is a world in which investment capital helps build a sustainable and equitable economy.
For more information on the Trends Report, SRI, and membership go tohttp://www.socialinvest.org
 The UN Principles for Responsible Investment (PRI) have been developed as an investor initiative in partnership with the UN Environment Programme Finance Initiative and the UN Global Compact. More than 800 asset owners, investment managers and other investment service providers from around the world, with combined global assets of $18 trillion, have become signatories to the UN PRI. For more information go to http://www.unpri.org