The growth of assets in sustainable and impact investing strategies continues to soar, drawing in funds from a broad swath of retail and institutional investors.
It remains difficult to know exactly who is investing in these approaches, and what strategies they are drawn to, but self-reported survey data and independent analysis by the US SIF Foundation shows ESG is now firmly within the mainstream in the US.
On Monday, 16 November, the US SIF: The Forum for Sustainable and Responsible Investment’s biennial report on sustainable investing found assets in these strategies climbed 42% to $17.1 tn from about $12tn in 2018. That figure represents a third of all US assets under management.
Of the total, $16tn is invested by money managers, institutional investors, and community investment institutions that use environmental, social, and governance (ESG) criteria when analysing and selecting investments. Another US$2.2tn is held by those that submit ESG-related shareholder resolutions to public companies.
Those are huge figures. But what’s striking is that of the $16.6tn invested using ESG criteria, nearly $11.5tn — or a whopping 69% — is in “undisclosed investment vehicles.” The managers for 60% of these investments, representing US$6.9tn in assets, also didn’t specify which ESG factors guide their strategies, according to US SIF.
As the report said, “ESG incorporation into asset management is growing rapidly, but transparency is not keeping up with the field’s rapid evolution.”
Undisclosed investment vehicles
Most of the money managers of this opaque pool of undisclosed assets — which grew 53% since 2018 — didn’t actually respond to US SIF’s request for information. Instead, the bulk of the data was gleaned from various types of public disclosures, including Principal for Responsible Investment (PRI) transparency reports.
PRI transparency reports “don’t require companies to specify the number or types of investment vehicles involved, and they don’t necessarily require the firms to disclose specific ESG criteria they consider,” says Meg Voorhes, US SIF’s research director.
At least 9% of this giant opaque pool of assets, or about $1.1tn, are in separate accounts reported by 75 investment firms, up from 86 firms reporting $335bn in separate account assets in 2012 and 80 firms reporting assets of $1tn in 2018, US SIF said.
Separate accounts are investment pools customized and managed by an asset management firm for a single client, unlike mutual funds which pool assets from several clients. Separate accounts typically require high minimums of about $100,000 in assets.
US SIF didn’t break out the separate accounts in their study because the investment firms didn’t report data from these accounts consistently. Some provided detailed information, but others combined multiple account strategies into one entry, leading to “uneven comparisons,” the report said.
It’s possible a larger percentage of undisclosed investment vehicles include more separate accounts for individual wealthy investors, but some of the investments could represent mandates from large institutional clients, including sovereign wealth funds or non-US retirement funds, Voorhes says.
One reason for the lack of clarity is simply the growth in sustainable investing, she adds.
Ten or 15 years ago, there were more smaller investment management firms in the field, with a few funds and vehicles using ESG criteria, in addition, perhaps, to a large mutual fund family or two with a socially responsible fund, Voorhes says.
But “increasingly, you are seeing large mutual fund families and investment firms looking at ESG across all of their assets,” she says. “It gets harder to report.”
Increasing interest in ESG by individuals
Most sustainable investing strategies are employed by institutional investors, but interest by individuals is accelerating.
Of the $16.6tn in assets invested using ESG criteria, US$12tn is invested for institutional investors (a 43% increase) while $4.6tn is invested for individuals (a 50% increase).
Of the $2tn held by investors that filed ESG-related shareholder resolutions, $1.7tn represented institutions and $322bn were filed by money managers (which includes retail mutual funds).
Where individuals are investing their $4.6tn is a bit unclear, however, because so many assets are in those undisclosed vehicles. Chances are a good portion are in mutual funds, which, along with other registered investment company vehicles like variable annuities and closed-end funds, represent $3.1tn in sustainable assets.
“Some high-net-worth individuals are investing in alternative funds, but the money managers who report some of these undisclosed investment vehicles do indicate a significant portion is for individuals,” Voorhes says.
Investing in sustainable alternatives
Aside from separate accounts, wealthy individuals and institutions invest in various ESG strategies through commingled funds and alternative investments, some of which allow for targeted investments designed to create a specific social or environmental outcome.
Assets in a variety of alternatives rose 22% overall in 2020, with most — $438bn of a total $716bn — in 681 private equity and venture capital funds. The number of funds in this category rose 21%, while assets jumped 55%.
Assets in property funds and real-estate investment trusts, meanwhile, fell 11% to $242bn, although the number of funds in this category rose 17% to 126. Assets in hedge funds rose 9% to $35.4bn, although the number of funds fell 8% to 98.
About $985bn of assets are also in commingled funds, which include privately managed nonprofit trusts and private debt funds.
ESG assets in family offices are underreported
Interviews with the leaders of three family office associations reveal hundreds of single-family and multi-family offices are involved in sustainable investing, US SIF said. But fewer than a dozen have responded to the foundation’s surveys over the years. Assets in the offices that have reported — primarily multi-family offices —however, jumped 50% in 2020 to $6bn from $4bn in 2018.
“Family offices have a penchant for secrecy, understandably, so we only have a small key hole through which we’re peering into that space,” Voorhes says. But family office associations “indicate there is a lot of interest in sustainable investing and using ESG criteria [and] impact investing, and there’s probably a lot more going on than what we are showing.”
Among ESG issues, the family offices surveyed are most concerned with environmental criteria, with climate change/carbon emissions and clean technology each affecting $4.8bn in assets. Issues concerning board governance, sustainable natural resources and agriculture, and small- and medium-sized businesses affected $4.7bn.
Rising assets in foundations
Foundations surveyed by US SIF’s reported a 43% rise in ESG assets under management since 2018 to $97bn —still a small figure representing only 2% of total institutional assets.
The top ESG issues for foundations are tobacco and conflict risk (ensuring investments aren’t supporting terrorist or repressive regimes). Environmental issues also rank high, with climate change and carbon emissions and clean technology topping the list.
Source: Private Equity News
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