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Assets managed with environmental, social and governance considerations continue to surge. And while still largely driven by institutional investors, the retail side is growing dramatically.
In fact, money managers who use ESG factors in their investment analysis say climate change continues to be their top concern and the leading criteria as they put money to work.
Between 2018 and 2020, total U.S.-domiciled sustainably invested assets under management, both institutional and retail, grew 42%, to $17.1 trillion, up from $12 trillion, according to the Forum for Sustainable and Responsible Investment’s 2020 trends report. The latter number represents 33% of the $51.4 trillion in total U.S. assets now under professional management.
Breaking it down further, money managers reported a 50% increase in the amount of assets they manage on behalf of retail or high-net-worth investors, growing to $4.6 trillion from $3.03 trillion during the same period, according to the report.
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Fund growth
In terms of investment vehicles, some of the most significant inflows (combining both institutional and retail dollars) have gone into exchange-traded funds, community investment institutions and alternative investment vehicles over the past two years, growing by 200%, 44% and 22%, respectively, according to Chris Phalen, research manager at the Forum for Sustainable and Responsible Investment.
The numbers behind the percentages are striking. According to a Morningstar report, “sustainable funds in the United States attracted new assets at a record pace in 2019.”
“Estimated net flows into open-end and exchange-traded sustainable funds that are available to U.S. investors totaled $21.4 billion for the year,” the report continued. “That’s nearly four times the previous annual record for net flows set in 2018.” View the Morningstar chart below to see the trend graphically.
Indeed, there was an inflection point at the end of 2018 when sustainably managed mutual funds and ETF assets grew to $2.8 trillion from $390 billion to Sept. 30 of this year, according to research from Sustainable Research and Analysis LLC, an independent ESG research firm.
For his part, Henry Shilling, the firm’s founder and director of research, identified several influences on growth gaining momentum over recent years, including:
- The Paris climate accord, adopted in 2016, which has sensitized more and more investors and asset managers to think sustainably.
- A fast-growing number of asset managers who are signing on to the UN Principles for Responsible Investment.
- More support and attention being placed on the social justice movement.
- More studies emerging, suggesting that investors don’t have to give up returns to work towards positive societal outcomes.
Many new players have entered the landscape, as well. In 2010, the 10 largest funds held 70.6% of sustainably invested assets under management; in 2020, the 10 largest funds accounted for only 38% of that total, suggesting large growth in the numbers of new sustainable funds, according to SRA.
New money flowing … or not?
The growth numbers within the sector bear some extra examination, said Henry Shilling, founder and director of research at Sustainable Research and Analysis LLC.
“About 85% of the growth in assets managed by sustainable mutual funds and ETFs is attributable to fund rebrandings – existing funds that formally modified their strategies to use sustainable approaches,” he said. “It’s not net new money.”
Indeed, 799 sustainable funds identified by SRA had been rebranded between January 2019 and September of this year.
Further muddying the meaning of the statistics is the fact that there is no universally accepted definition of a sustainable mutual fund or ETF among researchers, Shilling said. — D.N.
The ‘E’ and ‘G’ in ‘ESG’ lead
Environmental and governance criteria are emerging as leaders in attracting dollars, growing at 58% and 47%, respectively, since 2018, said Phalen.
More specifically, he added, “the environmental criteria that have grown the fastest are climate change/carbon and sustainable natural resources; [notably,] sustainable natural resources in particular grew 81% to $2.4 trillion and was not even in the top 10 environmental criteria in 2018.”
“In terms of governance criteria, assets managed with regard to executive compensation and corporate political contributions saw the largest increases over the last two years, at 122% and 80%, respectively,” Phalen added.
See the Forum’s chart below of top specific ESG criteria for Money Managers in 2020, whether invested through ESG incorporation and/or shareholder advocacy strategies.
Investor interest is growing broadly. A Morningstar report found that 72% of the U.S. population expressed at least a moderate interest in sustainable investing, while a Morgan Stanley survey determined that 85% of all individual investors were interested in sustainable investing, up 10 percentage points from 2017; concurrently, 95% of millennials had an interest, up 9 percentage points.
Advisor attitudes are changing, as well. According to a Nuveen report, advisors’ perceptions that clients are committed to social and environmental causes in their portfolio choices rose to 74% in 2019, from 44% in 2018.
Seeing this on the ground, David Wolf, CEO of BSW Wealth Partners in Boulder, Colorado, observed that “it used to be baby boomer females and millennials, but over the last three to five years, it’s across the spectrum.
“It has become the default setting.”