5 investment trends behind growth in sustainable and impact investing

Money talks, especially when you have almost $9 trillion at play.

The total dollars invested in the United States through sustainable, responsible and impact investing reached $8.72 trillion in 2016, up 33% from 2014, according to the US SIF Foundation’s latest biennial “Report on US Sustainable, Responsible and Impact Investing Trends.”

Increasingly, money managers and institutional investors across the United States are evaluating their investments in stocks, bonds, private equity and other vehicles on environmental, social and governance (ESG) factors. The growing trend toward responsible investing is driven by client demand: Many individual investors and institutions want to make sure that the enterprises in which they invest don’t fund practices that run counter to their personal or organizational values.

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But ESG investing also attracts value as well as value investors. Most studies of long-term portfolio performance show that investors who consider ESG factors in addition to standard financial measures fare slightly better than those who build their portfolios based solely on traditional criteria.

Responsible investing takes three main forms, which can be employed separately or together:

• Excluding or underweighting companies that participate in practices or produce products that are controversial, harmful or unsustainable;

• Prioritizing companies and other investments that rank high against ESG standards or produce social benefits; and

• Filing shareholder proposals to, or otherwise engaging with, the managers of portfolio companies to persuade them to adopt better ESG practices.

The following are five significant trends behind the $8.72 trillion in sustainable, responsible and impact investments identified in the report.

1. Climate change is the leading environmental concern among investors.

The combined assets of investors factoring climate change into their decision making is more than three times higher in 2016 than in 2014. In September, BlackRock issued a statement that all investors should be factoring climate change into their investment decisions. Many asset managers believe analyzing corporate responses to climate change is a way to identify investment winners from losers.

2. Conflict risk is the top social concern among investors.

The “Trends” report defines conflict risk policies as those restricting investment in “companies that conduct business in countries identified as repressive regimes or state sponsors of terrorism.” Conflict risk and climate change are closely related. Dozens of papers and articles have linked the hardships wrought by climate change to the conflict in Sudan; climate change is also a factor in the war in Syria. In its 2014 Climate Change Adaptation Roadmap, the Department of Defense considers climate change to be a threat multiplier, “because it has the potential to exacerbate many of the challenges we are dealing with today — from infectious disease to terrorism.”

3. An emerging trend is gender lens investing — investing with an explicit focus on products or companies that actively support women’s socioeconomic advancement.

Investment firms have created products that focus on companies that help women advance in the workplace and in society and on organizations that assist women living in poverty. A number of money managers and institutional asset owners have used shareholder advocacy to prod companies to bring more women onto their boards.

4. Concern about civilian firearms has contributed to a significant increase in assets that avoid investment in military contractors or weapons manufacturers.

For institutional investors, the report found $845 billion in assets affected by these concerns, up 138% 2014, and 1,042% from 2012. A galvanizing event for many institutional investors, including public retirement systems, was the mass shooting of children and teachers at an elementary school in Newtown, Conn., in 2012. This and similar tragedies have prompted some of the country’s largest public retirement plans to establish policies to divest from gun manufacturers.

5. Corporate governance issues are becoming more prominent in investment analysis and portfolio selection.

Numerous U.S. money managers and asset owners are now analyzing companies’ boards of directors, transparency and anti-corruption policies, and executive pay practices more than ever before. Many shareholders are raising concerns over corporate political spending and lobbying, with more than 370 proposals filed from 2014 through 2016 requesting disclosure and better oversight.

(More: RIAs making investments to attract socially responsible clients)

The US SIF Foundation report provides many more insights into the growing field of sustainable and impact investing, which shows no signs of slowing. A growing number of investors understand that the tools and strategies of sustainable investing provide important insights, mitigate risk and benefit society at large.

Julie Gorte is senior vice president for sustainable investing at Pax World. Meg Voorhes is director of research at US SIF: The Forum for Sustainable and Responsible Investment.