Spurred on by environmental activism and increasing government mandates, more investment money is moving into funds promoted by social-responsibility advocates.
At the heart of climate-friendly portfolios are funds and firms certified for environmental, social and governance, commonly known as “ESG” funds, and an increasing number of investors seek pathways to put money into companies or funds whose mission claims environmental benefits.
Leading the way is one of the world’s leading investment firms, BlackRock, and its CEO Larry Fink. In January, he told CEOs and investors his firm would put even more emphasis on climate change and renewable energy this year.
“I believe this is the beginning of a long but rapidly accelerating transition — one that will unfold over many years and reshape asset prices of every type,” Fink wrote. “We know that climate risk is investment risk. But we also believe the climate transition presents a historic investment opportunity.”
In his most recent letter to CEOs, Fink said that from January through November 2020, ETF and mutual fund investors put $288 billion in sustainable assets, a 96 percent jump from 2019. Blackrock manages nearly $9 trillion in assets.
Some investors have indicated they intend to follow Fink’s lead.
A survey of BlackRock clients shows they plan to double their investments in sustainable products over the next five years. The survey covers more than 400 investors in 27 countries, accounting for $25 trillion in assets. European investors were more likely to add environmental-friendly assets, BlackRock said, though a growing number of American and Asian investors are also expressing more interest in sustainable investments.
According to data from Monrningstar researcher Jon Hale, environmental, social and governance funds surpassed $1 trillion globally in June 2020, rebounding strongly from the pandemic selloff in March.
“Thetectonic shift we identified earlier this year has really taken hold, as the convergence of political and regulatory pressures, technological advancements and client preferences have pushed sustainability into the mainstream of investing,” said Mark McCombe, chief client officer at BlackRock in a Dec. 3, 2020, news release.
Since its creation in 2005, the environmental, social and governance rating system has been used to help investors identify companies or funds that meet certain criteria for sustainability or social impact. While “environmental” and “sustainability” are the main criteria in a positive rating, the system also considers compensation structure for both employees and executives, diversity and management structure.
However, as KPMG notes, environmental, social and governance ratings are more of a judgment than a science, as there are at least 30 major firms providing data on the sustainability of major companies.
“These ratings agencies use a combination of company disclosures, publicly available resources and proprietary research,” wrote Neil Macdonald, head of Wealth & Asset Management Centre of Excellence for KPMG in China. “Some providers will use AI technologies to scan the internet for news and developments that might affect the company’s rating. Although [these] ratings are not perfect, they serve an important role in providing a snapshot of a company’s performance to support more sustainable investment decisions.”
S&P Global created an environmental, social and corporate governance-focused index to follow companies with significant sustainability scores. Since its launch in January 2019, the S&P 500 ESG has kept pace with the firm’s flagship index, the S&P 500.
More investment funds are creating climate-focused products for investors looking to add green to their portfolio.
The TPG Rise Fund, which focuses on providing capital to help “a new generation of entrepreneurs build profitable businesses that deliver positive and sustainable impact,” includes U2 lead singer Bono among its founders. Now, the fund is adding former U.S. Treasury Secretary and Goldman Sachs CEO Hank Paulson to lead the newly established TPG Rise Climate fund.
However, there has been resistance to some environmental, social and corporate governance investing, especially when it comes to using these funds as part of a pension portfolio. The issue came to a head in October when the Department of Labor laid out new guidelines that would restrict some pension fund managers from using environmental, social and corporate governance ratings to evaluate inclusion in a pension portfolio.
An analysis of the Labor Department rule by international law firm Latham & Watkins found it adopts the idea that “consideration of environmental, social and corporate governance factors are somehow at odds with financial factors and fiduciary responsibilities of plan sponsors.”
“The DOL’s heavy-handed approach to ‘safeguard the interests of [ERISA plan] participants and beneficiaries’ does not bode well for increased commitments by North American pension funds to achieve net-zero carbon emissions across their portfolios, as is happening in Europe and Asia,” attorneys for the law firm wrote.
The Institute for Pension Fund Integrity applauded the Labor Department decision, as it argued the ruling “further codify the most basic tenet of fiduciary duty: Investment decisions should be governed by considering risk and returns, not any outside political agenda.”
The decision was spurred by questions about whether environmental, social and governance funds placed environmental and social concerns over financial considerations.
Those concerns were amplified in a study by three Harvard Business School professors.
Michael E. Porter, George Serafeim and Mark Kramer wrote, “We are entering a new stage of understanding of the linkage between investment performance and social impact. Previous approaches, such as socially responsible investing and environmental, social, and governance (ESG) screening, have obscured the opportunities for higher growth, profitability, and competitive advantage that come from creating shared value: addressing social and environmental issues as integral to a company’s core strategic positioning.”
In another study, the Pacific Research Institute found that over a 10-year period, the assets in environmental, social and corporate governance-rated funds were outperformed by S&P 500 funds by nearly 44 percent.
“In recent years, ESG funds have been presented to investors as socially responsible, as well as likely to outperform broader based funds. But the long-term record of ESG funds when compared to an S&P Index fund show that’s not necessarily the case,” said Dr. Wayne Winegarden, author of the study and senior fellow in business and economics at the Pacific Research Institute. “While ESG funds offer environmental and socially conscious investors an investment option that suits their interests, based on the historical record, they should not see these investment vehicles as likely to outperform the broader market.”
(Edited by Bryan Wilkes and Fern Siegel)
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