Major SRI Drivers and Emerging Trends

• Money managers increasingly are incorporating ESG factors into their investment analysis and portfolio construction, driven by the demand for ESG investing products from institutional and individual investors and by the mission and values of their management firms. Of the managers that responded to an information request about reasons for incorporating ESG, the highest percentage, 80 percent, cited client demand as their motivation.

• The growth of the Principles for Responsible Investment (PRI) and the first annual publication of the PRI’s Responsible Investment Transparency Reports in summer 2014 has led to new data about money managers that engage in ESG integration (or “general” environmental, social and governance considerations) across multiple asset classes. The increasing popularity of SRI has led major money managers including Capital Group and Wellington Asset Management to expand the application of ESG factors to wider portions of their portfolios.

• Of the money managers that responded to an information request about their ESG incorporation strategies, more than half reported that they use negative screening within their funds. Others reported using strategies of positive screening, impact investing and sustainability-themed investing. Yet the incorporation strategy that affected the highest number of assets, $4.74 trillion, was ESG integration. (See the glossary of ESG incorporation terms below.)

• Following the December 2012 shooting at Sandy Hook Elementary School and growing pressure from elected officials and stakeholders, institutional investors and money managers alike have incorporated investment criteria related to military and weapons production. In the past two years, consideration of these criteria by money managers has grown nearly four-fold in asset-adjusted terms, incorporated by 292 investment vehicles representing $588 billion in assets. Among institutional asset owners, concerns over military and weapons production now apply to $355.1 billion in assets, a nearly five-fold increase.

• For both money managers and institutional investors, climate change remains the most significant environmental factor in terms of assets, affecting $275.6 billion and $551.5 billion, respectively. Fossil fuel restriction or divestment policies, tracked for the first time in 2014, accounted for $29.4 billion in money manager assets and $13.5 billion in institutional investor assets at the beginning of 2014. Additionally, in the past year, momentum around fossil-free investment has continued to grow in ways that this report’s snapshot of the field at the beginning of 2014 does not fully reflect. Moreover, shareholders concerned about climate risk filed 72 resolutions on the subject in 2014, more than double the number in 2012, and negotiated a number of commitments from the target companies to disclose and reduce their greenhouse gas emissions.

• Place-based investing, largely by public funds directing investment into their city or state in targeted strategies, emerged as a new trend, accounting for nearly $90 billion in assets.

• The number and proportion of shareholder proposals on social and environmental issues that receive high levels of support has been trending upward.

• In response to shareholder campaigns for better corporate governance practices, the number of US companies establishing more stringent standards for their board elections continues to grow. These companies are requiring directors to submit to annual elections and to offer their resignations if they fail to receive approval from the majority of shares voted.

• Individual and institutional investors have given overwhelming support to a rulemaking petition urging the US Securities and Exchange Commission to require companies to disclose their political spending. The SEC had received more than 1 million comments on the proposal—a record in SEC rulemaking history.