The truth about ESG and sustainable investment
10 things to know about
ESG and sustainable investing
As of year-end 2021, the US SIF Foundation identified $8.4 trillion in total US-domiciled assets under management (AUM) using sustainable investing strategies. This represents 13 percent—or 1 in 8 dollars—of the total US assets under professional management.
Sustainable investing is an investment discipline that considers environmental, social and corporate governance (ESG) criteria alongside all of the other financially material risks and opportunity factors in order to generate long-term competitive financial returns.
Recently, politicians in Congress and state legislatures have attacked ESG and sustainable investing as irresponsible, ineffective or partisan in nature. Nothing could be further from the truth.
Here are 10 reasons sustainable investing is needed and is here to stay:
Sustainable investing
is main street investing.
Source: Morgan Stanley
Professional and "main street" investors want to align their investments with critical ESG criteria to achieve long-term returns, unlock value and ensure stable markets. ESG helps to identify strategic and intrinsic corporate value as well as systemic trends at the country, regional and global level. It’s not just about risk; it is also about identifying leaders, spotlighting opportunity and aligning with broader environmental and societal goals. The truth about ESG is that sustainable investing is popular, despite unwarranted political attacks on the industry.
Types of investors:
- Individual retail investors, including high net worth individuals.
- Asset managers such as mutual fund companies or private equity funds.
- Development banks and finance institutions internationally.
- Institutional asset owners such as public pension funds, insurance companies, educational institutions, philanthropic foundations and others.
Motivations/goals:
- Individual investors may be driven by personal values and goals while institutional investors may be guided by their internal risk management approach or diverse investment fund philosophies.
- Financial advisors and asset managers may want to respond to the demands of clients or plan participants.
ESG considerations are about investment results,
not politics.
Prudent investors consider financially material ESG factors when managing risk and seeking investment opportunities.
Experienced sustainable investors use ESG data along with other sound financial analysis to make long-term investment decisions that make sense given today’s real and meaningful environmental, social and governance challenges. Some investors argue that considering ESG data along with other risk factors is a part of an investor’s fiduciary duty to their clients.
Source: MSCI
The market has embraced
investment practices that put ESG at the core.
Employees and customers want companies to be good actors.
Companies with strong ESG performance can achieve lower cost of capital. They can gain access to cheaper debt and equity financing as financial institutions view them as lower risk. Companies also have a responsibility to not simply put profits first when there is a potential for environmental and social harm.
Sustainable investors are
investing in a better future.
Investors seek investments in sustainable and resilient companies that can address structural and systemic risks while finding innovative opportunities in a more sustainable economy.
They provide capital to the most innovative parts of our economy, including electric vehicles, solar panels, sustainable and green building technologies. They invest in innovations in biotechnology and science to help people live healthier lives and adaptive technologies to help traditional industries adjust to a more sustainable future.
Don’t forget about the “S” and the “G” in ESG. Sustainable investing isn’t only about mitigating climate change. Other ESG criteria that sustainable investors often consider include anti-corruption, workers’ rights and compensation and global food security.
Source: US SIF 2022 Trends Report
Source: NASA
Sustainable investing is an important strategy
for addressing climate change.
Climate scientists continue to warn that our economy must change to mitigate the greatest harms of climate change. Meaningful policy changes are the most important strategy to address this, but the role of investors to finance the transition to a low carbon economy—in partnership with government—is essential.
The most recent IPCC report concluded that climate change may be happening more quickly than expected. Unless there are immediate, rapid and large-scale reductions in greenhouse gas emissions across all sectors and regions, limiting warming to close to 1.5°C or even 2°C in the next few decades will be beyond reach.
Time is running short and more dramatic steps to reduce emissions and mitigate climate change are necessary to reduce the impact of a warming climate. The role of sustainable investors has never been more important.
Politically motivated and simplistic attacks on "ESG"
hurt the economy and politicians' constituents.
Attempts by policymakers to remove or prohibit sustainable funds (or even consider ESG factors in the investment process) ideologically motivated political posturing that will result undermine the ability to make smart investments in their constituents’ retirement assets and ultimately their states’ futures.
These efforts will reduce investment choice and prevent investors from selecting investments from hundreds of institutions, including leading financial services firms. This, in turn, will increase risk and borrowing costs.
Sustainable investing represents
the free market.
ESG investors are voting with their dollars and seeking investment opportunities that fit their investment approach and their clients’ risk profiles and values. Attempts to limit ESG considerations are anti-free market and hurt investors at all levels.
Investing sustainably
reduces risk.
Fiduciary Duty
Like all investment professionals, sustainable investment professionals have a fiduciary duty to manage risk and return on behalf of their clients; not to consider material ESG factors would be a breach of duty.
Core Element of Investing
Institutional asset owners, among the most sophisticated investment management professionals, view investing using ESG metrics as “a core element of investing,” according to a Morningstar study.
Long-Term Benefits
Numerous studies point to the long-term benefits of sustainable investing.
Investors and their advisors are becoming
more sophisticated.
Individuals have a range of educational tools and resources to help them find best-in-class sustainable investment managers and approaches. Examples include Morningstar, As You Sow and the US SIF Foundation's Education Center.
Increasingly, financial advisors are building sustainable practices and completing advanced training and accreditation.
Learn more about the CSRIC designation
The sustainable investment industry has
grown in sophistication and rigor.
Industry leaders and practitioners are encouraged to adopt and follow industry best practices:
INCREASE
transparency and
accountability
DEEPEN
incorporation of
ESG factors
PARTICIPATE
in knowledge
sharing
ENGAGE
in investor advocacy
to advance ESG issues
MEASURE
and manage
impact
ADVANCE
public policy on
sustainable investing
This website is presented by US SIF: Sustainable Investment Forum, the leading voice advancing sustainable investing across all asset classes. Its mission is to rapidly shift investment practices toward sustainability, focusing on long-term investment and the generation of positive social and environmental impacts. US SIF’s hundreds of members represent more than $5 trillion in assets under advisement or management.
US SIF is supported in its work by the US SIF Foundation, a 501(C)(3) organization that undertakes educational, research and programmatic activities to advance the mission of US SIF.
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Sustainable Investing: An Online Course for Individual Investors
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Adding Sustainable Funds to Defined Contribution Plans: A Resource Guide for Plan Sponsors
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Getting Started in Sustainable Investing: A Guide for Individual Investors
Want to learn more? Visit the US SIF Education Center!
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