By Ang Gao
“Your capital can do more than generate returns.”
This used to be a slogan persuading investors to be more socially impactful. But now it’s a trend.
Sustainable, responsible and impact investing, or SRI, is an investment discipline that “considers environmental, social and corporate governance criteria to generate long-term competitive financial returns and positive societal impact,” according to US SIF: The Forum for Sustainable and Responsible Investment, an association that advances SRI across all asset classes.
The total U.S.-domiciled assets under management using SRI strategies grew to $8.72 trillion at the start of 2016, an increase of 33 percent since 2014 and a 14-fold increase since 1995, taking up around 21.6 percent of total U.S. assets under management of $40.3 trillion, according to the latest data compiled by the association.
Now it’s common for investors to have a preference for companies with higher environmental-social-governance ratings, said Lloyd Kurtz, senior portfolio manager and head of Social Impact Investing at Wells Fargo Private Bank. Data used to be elusive but now databases tracking companies’ ESG performance have become available.
“Companies with a higher ESG ratio tend to borrow less money and are very strong financially on average,” said Kurtz. “We are still studying the risk for ESG companies but it looks like the average high-ESG company is a lot less risky.”
Evolution of Impact Investment
“There are lots of preconceived notions that sustainable investing is simply about aligning your investments with your values and that’s what changed most,” said Tim Coffin, senior vice president and director of sustainability at Breckinridge, a private investment advisor specializing in fixed income portfolio management.“Sustainable investing has evolved to be more about actual material decisions.”
For example, when an investor considers a company’s carbon intensity and decides that it may be bad for society, that’s based on value and belief, Coffin said. But if the investor anticipates that government may levy a carbon tax and this will hurt him as an investor, it’s becoming a material investment consideration, he went on.
“I think it’s because socially responsible investors figure out that the things they value have cost and risk,” Coffin said.
The Interfaith Center on Corporate Responsibility is a coalition of shareholder advocates who press companies on environmental, social, and governance issues. Starting in 2014, members of ICCR asked Walmart to treat its employees better, and in 2016 Walmart CEO Doug McMillon announced that the company would implement ethical recruitment practices.
“They were doing that primarily because they believe that Walmart has social responsibilities,” said Coffin. “But they are really evolved to say if you don’t do it, you are putting your investment at risk, and that’s basically moving into the mainstream.”
Breckinridge now manages $33.4 billion of assets for institutions and individuals, and it integrates the ESG factors into all of them, Coffin said. Commencing just six years ago, about $3 billion is now customized to invest only in those municipalities or companies that score above average on sustainability factors.
“People acknowledge that we can use capital markets and other innovative financial tools to solve social problems like education, obesity and climate change,” Coffin said. “And that’s a fascinating approach.”
In February 2018 Chicago Treasurer Kurt Summers proposed to consider ESG factors in making city investments.
Lagging Behind Europe
While assets using SRI strategies take up around one-fifth of total U.S. assets under management, that proportion pales in comparison to European SRI investments of 40 percent to 80 percent of the total, according to an SRI Study 2016 published by Eurosif, a European association to promote sustainable and responsible investment.
“The U.S. is still lagging a number of years behind Europe,” said Peter Stein, managing director of Lymetimber, a private timberland investment management organization.
One of Lymetimber’s largest investors is the Environmental Agency Pension Fund of the United Kingdom, which put more than $25 million into Lymetimber’s latest fund, taking up more than 10 percent of the fund.
“The U.S. government doesn’t do anything like this,” Stein said. “We have federal programs but not investment vehicles.”
When Lymetimber raised its first fund in 2001, only 10 percent of the capital came from impacting investors including college endowments and ultra-high net worth families. But when the firm raised a new fund in 2015, 55 percent of the capital come from impacting investors, Stein said.
“I think it’s because we have more education about impacting investment, and consumers and millennials are caring about this issue,” Stein said.
Matt Edlen of Gerding Edlen, a real estate investment and development firm based in Portland, Ore., said, “There is a much higher consciousness [about sustainable business] within people we’re offering our product to and the future generation.”
Edlen is optimistic about the future of sustainable and impacting investment, predicting that every city in the country is going to move in that direction and they will be the driving force.
“I don’t believe it’s going anywhere, it only grows,” Edlen said.