ESG investments lower than expected, totaling $8.4 trillion: Here's why

Sustainable investment assets totaled $8.4 trillion at the start of 2022, accounting for 13% of total U.S. assets under professional management.

“Money managers and institutional investors are using ESG criteria and shareholder engagement to address a plethora of issues, including climate change, conflict risk and anti-corruption, as well as labor and equal employment opportunity, corporate political activity and human rights,” said Lisa Woll, CEO of the US SIF Foundation. The foundation undertakes educational and research activities to advance the mission of US SIF: The Forum for Sustainable and Responsible Investment.

Woll participated in an online discussion of the foundation’s latest biennial “Report on U.S. Sustainable Investing Trends” on December 12. The report counted two main strategies as sustainable investing — ESG incorporation (applying various environmental, social and governance criteria in investment decision-making and portfolio construction) and filing shareholder resolutions on ESG issues.

The report identified $7.6 trillion in U.S. assets at the beginning of 2022 held by 497 institutional investors, 349 money managers and 1,359 community investment institutions that apply various ESG criteria. In addition, 154 institutional investors and 70 money managers controlling $3 trillion in assets under management led or co-led shareholder resolutions on ESG issues from 2020 through the first half of 2022. Eliminating double counting for assets involved in both ESG incorporation and filing shareholder resolutions produces the net total of $8.4 trillion in sustainable investing strategies.

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“This year, as a headline, we reported a lower number of assets in sustainable investing than in previous reports,” said Diederik Timmer, chair of the US SIF board. “The lower number comes from two separate factors. The first is that we have revised the research methodology to require investors to not only demonstrate that they care about ESG information but also demonstrate that it impacts their portfolio decision-making. The second factor is that investors themselves have been reporting lower numbers to us.”

He believes the change in approach will enhance the value of the report, which was first published in 1995—and is the most comprehensive study of sustainable investing in the United States.

“US SIF has raised the bar by modifying its methodology,” he said. “US SIF’s strategic goals include a focus on advancing best practices in the field, and we believe the shift in the trends report methodology contributes to this goal.”

Money managers and institutional asset owners cited climate change as the leading ESG criterion, with both groups saying it applied to more than $3 trillion of the assets under their management.

“It’s In the broader context of growing concern about the risks and opportunities associated with climate change,” said Joshua Humphrey, president and senior fellow at the Croatan Institute. “This has been a long-term trend we have tracked within this reporting and elsewhere.“

Among other highlights of the report:

• Money managers reported applying fossil fuel divestment policies across $1.2 trillion in assets under management, ranking fourth among all the ESG criteria they address. Avoidance of military- and weapons-related investments and tobacco-related investments ranked second and third for money managers, affecting $1.8 trillion and $1.7 trillion in assets, respectively.
• For institutional asset owners, the second-most-important ESG issue factored into investment decision-making was avoidance of companies doing business in countries with high-conflict risk, affecting $3.3 trillion in assets. Board issues and sustainable natural resources and agriculture were the third- and fourth-most-important ESG issues for institutional investors in asset-weighted terms, affecting $2.9 trillion and $2.8 trillion,
• From 2020 through the first half of 2022, 154 institutional investors and 70 investment managers controlling $3 trillion in assets under management led or co-led shareholder resolutions on ESG issues.
• The leading ESG issue raised in shareholder proposals was ensuring fair workplace practices, particularly ending de facto discrimination based on ethnicity and sex. Close behind in the numbers of proposals filed were concerns about corporate political activity and climate change.
• Community investing experienced rapid growth, with assets under management increasing 72% to $458 billion over the past two years and increasing more than 600% in the last decade.

The research took place as major regulatory developments occurred that will likely shape sustainable investing for years to come. The U.S. Securities and Exchange Commission released two proposals, one to prevent misleading fund names and another to require greater transparency around funds’ consideration of ESG factors. In addition, the U.S. Department of Labor ruled that ERISA-governed pension plans may include ESG-oriented funds and removed impediments to shareholder engagement and proxy voting.

“With new issues such as biodiversity being added to the trends report survey, we are confident that there will be continued growth in the ESG issues that investors will consider in the future,” Woll said.