Sustainable Investing: The Enduring Revolution

The climate crisis is precipitating a sustainable investment revolution, and I think that revolution will endure in 2020.

When the environmentally-responsible mutual fund company that I lead was founded in 1991, the average investor was not concerned about sustainability. Times have changed.

Nearly 80 percent of respondents to a recent study said that they “love the idea of investing in companies that care about the same issues” as them. This isn’t just lip service.

Investors are putting their money where their mouth is: sustainable funds attracted an estimated $8.0 billion in net flows in the first half of 2019, vastly eclipsing the $5.5 billion in flows for all of 2018.

All told, sustainable, responsible, and impact (SRI) investing assets now account for one in four dollars in total assets under professional management in the United States, according to the most recent US SIF Foundation Report on U.S. Sustainable, Responsible, and Impact Investing Trends.

I expect the exponential growth of environmental, social, and governance (ESG) investing to continue in 2020; and I think three factors largely will drive it.

The climate crisis — Concerns about climate change continue to mount. Each new day seems to carry another account of deadly heat waves, devastating tropical storms, raging forest fires, or some other cataclysmic effect of climate change. As long as the existential threat posed by the climate crisis looms, investors are going to seek out ways to invest with their values.

The material risks associated with the climate crisis — There is growing evidence that corporations that manage their ESG risks may outperform their competitors. A Harvard Business School study found that “high sustainability companies significantly outperform their counterparts over the long term, both in terms of stock market and accounting performance.”

Millennials — In the coming years, millennials will be the beneficiaries of the largest generational wealth transfer in human history — and millennials tend to care deeply about the environment. Almost three-quarters of the 92 million American millennials say that “global warming” is “personally important” to them. Millennial investors also are nearly twice as likely as non-millennials to make investment decisions based on specific environmental or social outcomes. I don’t foresee the millennial commitment to sustainability waning in 2020.

Increased “Sustainable” Investing Options

Given the skyrocketing interest in ESG investing, it’s unsurprising that “sustainable” investment options have proliferated — and I expect this trend to continue in 2020.

Between 2016 and 2018, the number of SRI mutual funds increased 50 percent and the number of ESG-themed exchange-traded funds (ETFs) grew 176 percent. While the number of new SRI/ESG funds may not continue to expand at this breakneck pace, I still expect steady growth. It’s simple supply and demand. In 2018, the ESG assets managed by the 500 largest global asset managers rose by 23 percent, while their overall AUM shrank three percent.

More Skepticism of ESG Greenwashing

Many of the new or revamped ESG funds are products of firms that historically have cared very little about sustainability. Few of their products use values-based screens and most only selectively consider ESG performance. I anticipate a growing skepticism of ESG greenwashing in 2020, as savvy investors learn that some “sustainable” funds include the companies most responsible for the climate crisis.

Larry Fink, CEO of BlackRock, the largest asset manager in the world, received plaudits for writing in his 2019 annual letter to shareholders that “every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”

For investors concerned about the climate crisis, these are encouraging words — but where’s the (faux) beef? Blackrock remains the largest global investor in coal and one of the largest investors in oil and gas companies. At some point, I believe environmentally-responsible investors are going to start asking if it’s even possible to invest sustainability with a company like BlackRock.

Shareholder Proposals

As investors become more knowledgeable about ESG investing, I think they also are going to start asking more questions about how these new entrants are engaging with the companies they’re invested in — especially in regard to proxy voting, which is the most fundamental way shareholders can express their views to corporate management.

Climate related shareholder proposals are an integral way for shareholders to press companies to improve their sustainability and reduce their exposure to the risks associated with the climate crisis and environmental degradation.

In the year ending August 31, 2018, BlackRock and Vanguard, the two largest U.S.-based fund managers, supported only 23 percent and 33 percent of climate crisis reporting proposals. For comparison, the largest asset manager in the U.K., Legal & General, supported 85 percent of such proposals. Even the ESG-branded portfolios of BlackRock and Vanguard voted in favor of shareholder resolutions less frequently than peers, according to a Morningstar analysis.

If BlackRock and Vanguard had supported these investor efforts to address climate risks, at least 16 climate-related shareholder resolutions at S&P 500 companies would have garnered majority support in 2019. I think investors will start taking more notice of this inconsistency in 2020.

I also expect an uptick in the number of shareholder proposals that pertain to deforestation in 2020. Other firms finally are realizing that ending the destruction of tropical forests is one of the easiest and best ways to combat climate change and that corporations that fail to address this very real material risk are doing a disservice to their shareholders.

Investors are increasingly choosing to invest in responsible funds because they care about the environment and are concerned about the climate crisis. As SRI investing moves into the mainstream, I think investors are going to start demanding that firms walk the walk when it comes to sustainability.

This means supporting climate related shareholder proposals, publicly pressing companies to improve their sustainability, and – ultimately, I believe – divesting from the most polluting industries on the planet. Already, more than 1,000 organizations, almost 60,000 individuals, and at least one entire country have joined the divestment movement. I expect this trend to continue in 2020, too.

Vive la (sustainable) révolution!

Article by Leslie Samuelrich, who leads Green Century Capital Management, focusing on the firm’s investment strategies, business development, and impact investing program. The Green Century Funds have experienced 185% growth under her leadership. Ms. Samuelrich has more than 25 years of experience in ESG investing, corporate engagement, and environmental and public health advocacy. Her comments have appeared in The Wall Street Journal, Bloomberg, The New York Times, Responsible Investor, Barron’s, and many other outlets. She currently serves on the Board of Directors of the Forum for Sustainable and Responsible Investment (US SIF) and the Advisory Board of the Intentional Endowments Network. She is a guest lecturer on impact investing at The Wharton School and annually presents at dozens of national and regional industry conferences and events. Ms. Samuelrich holds a BA in Economics from Boston College.