Two new reports highlight the expanding adoption of Environmental, Social, and Governance (ESG) criteria among money managers, as well as the benefits to the bottom line that accrue to ESG-savvy investors.
The biennial Report on US Sustainable, Responsible and Impact Investing Trends from US SIF, the trade organization for the SRI industry, shows a continuation of the rapid adoption of ESG criteria among mainstream money managers that was noted in the previous Trends Report. In the last two years, the value of portfolios that include consideration of ESG factors has mushroomed by 69%, to over 8 trillion dollars, under the management of 777 money managers and institutional investors, and over 1000 community investing financial institutions. While the number of more active money managers who filed shareholder resolutions
In the face of continued grim climate news and disturbing societal trends, it is increasingly clear that governments cannot marshall the resources—or perhaps even the will—necessary to the tasks before us. Increasingly, though, forward-looking investors are stepping in to help lead the way forward. Two recent reports offer some encouraging signs that global finance does indeed include many actors who are committed to the changes that we need.
Domestically, a progress report on an impact investing initiative from the White House Office of Social Innovation and Civic Participation shows actual investments to be outpacing and outperforming the initial commitments and expectations. When this private-investment initiative was announced in June 2014, they had $1.5 billion in new commitments to impact investments from private funds, foundation programs and endowments, investment banks, small family foundations, and nonprofit organizations. By the time the dust settled on the first round of planning, that total had grown to $2.5 billion to be invested over the five years from 2014-2019. The recent report followed up and found that in just the first eighteen months, through December 2015, almost half of this total had already been invested, suggesting that in the long run the goal may well be exceeded. This is especially likely when we turn to the returns coming in on the early investments, which universally have exceeded expectations. It turns out—no surprise to the SRI community—that investing in projects with strong social and environmental impact is very good business! So far, about two-thirds has been invested for social impact and one-third for environmental impact, especially climate solutions. 81% has been invested here in the U.S.
Internationally, the news is also encouraging. A recent UN report outlines the challenges before us: to meet both the UN’s 2030 Sustainable Development goals and the targets in the Paris climate agreement, $90 trillion of investment is needed over the next 15 years. This amounts to about 8% of global GDP over this timeframe, a daunting but not unrealistic goal. But to get there, it will mean marshaling the same power of private financing. As former Secretary of the Treasury Hank Paulson points out in an op-ed entitled How to Raise Trillions for Green Investments:
“The good news is that there is a global abundance of private capital. To unlock these riches, governments must create conditions that encourage private investment in clean technologies and sustainable development. With smart, well-designed and coordinated policies, financing models and instruments like bonds and incentive programs, countries have the potential to solve some of the planet’s most pressing environmental challenges while still maintaining economic growth.”
Paulson is especially enthused about the explosive growth of green bonds, which nearly quadrupled from 2013 to 2015, up to $42 billion. Of this, 40% is being deployed in China, where the government there has set ambitious green energy and building targets. The Building Energy Efficiency and Green Development Fund is a public-private partnership that will bring leading-edge technologies from U.S. companies to China to increase the energy-efficiency of new buildings there. (One more reason to NOT start a trade war with China!)
All this investment is still just the first few drops in the $90 trillion bucket, but the rapid ramping up of these and other green investment commitments suggests that the financial powers that be are finally waking up to the scope of our challenge and are ready to put their massive wealth to work making the changes that are needed. Time will tell whether it will be enough, but we’re encouraged that it’s happening on a scale we haven’t seen before.
Did you know that despite the lack of any federal laws protecting LGBT people from discrimination, three-quarters of Fortune 500 companies have policies in place to do just that? The “S” part of corporate ESG (Environmental, Social, and Governance) standards and SRI (Socially Responsible Investing) has been coming alive in increasingly dynamic ways in recent years.
This year, as three southern states passed laws that actively codified anti-LGBT discrimination, some of the loudest—and most effective—voices raised against these initiatives came from large companies. As summarized by The New Yorker:
Last month, executives at more than eighty companies—including Apple, Pfizer, Microsoft, and Marriott—signed a public letter to the governor of North Carolina urging him to repeal the state’s new law. Lionsgate Studio is moving production of a new sitcom out of the state, Deutsche Bank cancelled plans to create new jobs there, and PayPal has cancelled plans for a global operations center. In Mississippi, G.E., Pepsi, Dow, and others attacked the law there as “bad for our employees and bad for business.” Disney said that it would stop making movies in Georgia, which has become a major venue for film production, if the governor signed the bill. Something similar happened last year in Indiana, after the state passed a religious-freedom law allowing businesses to discriminate against L.G.B.T. customers and employees. At least a dozen business conventions relocated.
The article goes on to look at the ways this leadership by corporate interests upends both progressive and conservative orthodoxy. Progressives often decry the influence of business on government decision-making, but this time it’s a welcome addition to grassroots voices against regressive new state laws. Meanwhile, as the New Yorker’s James Surowiecki notes, “to many conservative business leaders, today’s social-conservative agenda looks anachronistic and is harmful to the bottom line; it makes it hard to hire and keep talented employees who won’t tolerate discrimination.”
Though we’ve long been champions of the idea that business can play a key role in reshaping society in positive ways, this vocal leadership on perhaps the leading social justice issue of the day is a welcome surprise.
A new set of regulations issued by the US Department of Treasury opens the door for private foundations to direct more of their investments to socially and environmentally beneficial projects. Foundations are careful to separate their investment portfolio, used to grow their asset base, from the funds used to further their charitable mission, distributed in the form of grants or loans. In recent years, many foundations that wanted to support social entrepreneurship or make loans to organizations within the areas of their missions had to treat these as part of their grant-making budget, rather than as part of their investment portfolio.
The new rules clarify that foundations “can factor in how the anticipated charitable outcomes from the investment might further the foundation’s mission in addition to the financial returns that are typically considered. Thus, a foundation may prudently choose to make investments that provide both a charitable and a financial return without fear of facing a tax penalty.”
For more on this welcome new Zone 8 and 9 development, see this press release, issued by the Director of what sounds like a fantastic place to work: the White House Office of Social Innovation and Civic Participation.
Earlier this year, a new talk by Al Gore was posted on the TED site: The case for optimism on climate change. The 20-minute talk and subsequent short interview with TED-meister Chris Anderson is well worth a look. Much of his optimism centers on the rapid shift in electricity production:
The best projections 14 years ago were that we would install one gigawatt of solar per year by 2010. When 2010 came around, we beat that mark by 17 times over. Last year, we beat it by 58 times over. This year, we’re on track to beat it 68 times over. We’re going to win this. We are going to prevail. When I came to this stage 10 years ago, this is where (the growth curve for solar) was (see arrow on image at top of post). We have seen a revolutionary breakthrough in the emergence of these exponential curves.
Gore quotes economist Rudi Dornbusch, who said, “Things take longer to happen then you think they will, and then they happen much faster than you thought they could.” Importantly, the business community has been quick to jump onto the bandwagon, and in fact has been crucial to the rate at which its been gathering steam. “This is the biggest new business opportunity in the history of the world, and two-thirds of it is in the private sector,” notes Gore. “We are seeing an explosion of new investment. Starting in 2010, investments globally in renewable electricity generation surpassed fossils. The gap has been growing ever since.”
Beyond these trends, Gore stresses the underlying nature of humanity, and of fundamental social changes:
Readers of The Resilient Investor will remember that our picture of more vibrant local economies is rooted in a shift from national and international trade networks toward increasingly vibrant regional economic systems. A recent article in the NYTimes speaks to the emerging regional character of the US economy and society, suggesting that national policy should be redirected from state-specific funding, and instead nourish the already-emerging regional networks, which can then breathe new life into their surrounding rural areas and depressed smaller cities:
America is increasingly divided not between red states and blue states, but between connected hubs and disconnected backwaters. Bruce Katz of the Brookings Institution has pointed out that of America’s 350 major metro areas, the cities with more than three million people have rebounded far better from the financial crisis. Meanwhile, smaller cities like Dayton, Ohio, already floundering, have been falling further behind, as have countless disconnected small towns across the country.
Here’s the map of the US that the authors suggest we begin to plan around (click for larger version):
The World Bank plans to continue its aggressive funding of climate-related projects over the next four years, gradually increasing its combined total funding and leveraged co-financing from private investors to $29 billion per year, 28% of its total outlays (up from today’s 21%) and enough to meet nearly a third of the global target of $100 billion per year that was set at the Paris climate talks. In addition to these funding plans, all World Bank programs will consider climate impacts in future investments.
Projects in the pipeline include quadrupling funding for climate-resilient transport, a project in Mexico to reduce deforestation and forest degredation in an areas the size of Connecticut, and seven solar PV projects in Jordan, and development of an early-warning system for extreme weather events in areas that would help protect one hundred million people.
Michael Kramer continues to put the rest of our author team to shame in the media-appearance department; this time, we find him on ThinkTechHawaii, a daily online show based in his home state. The first half of this interview is a great overview of what Natural Investments’ approach to SRI is all about, including our new resilient investing framework; the second half digs into an initiative in the Hawaii state legislature to have the Employees Retirement System divest from fossil fuels.
Joel Makower of GreenBiz.com summarizes the concept succinctly:
The term has no official definition, but at its core, the circular economy is about “keeping the molecules in play.” In such a system, products are made primarily from benign and nontoxic ingredients — “nutrients” that can be returned safely to soil or water or, in the case of more durable components, placed back into service again and again. Toxic ingredients are not verboten; they can be used as needed in products or processes so long as they, too, are continuously cycled back into productive use and kept out of the waste stream. And, of course, as much of this as possible should be powered by renewable energy.
That all sounds like a generations-old greenie dream, but in the past couple of years, it’s gained adherents among corporate giants looking to capture some of the lost value in their products and packaging materials—one accounting found $11 billion of value in trashed U.S. packaging materials alone (see image above). The 2015 World Economic Forum’s annual conclave in Davos, Switzerland, affirmed its commitment to a 2-year-old initiative called Toward a Circular Economy, which will work with policy makers and the financial community to spotlight and scale current circular economy efforts, especially in the developing world. Makower’s valuable overview continues:
One of the best performers in this space is the little-known Parnassus Endeavor Fund (PARWX), a 10-year-old fund with $1.4 billion in assets managed by Parnassus Investments’ founder Jerome Dodson. . . . It emphasizes holdings that are considered outstanding places to work in terms of labor standards, diversity, benefits and leave policies, and employee health and safety. The fund is also one of a small group of funds that by policy does not hold companies engaged in the production, manufacturing, or refining of fossil fuels, while its broader environmental, social, and governance (ESG) criteria excludes alcohol, firearms, tobacco, gambling, nuclear power, and non-medical animal testing while prioritizing companies with outstanding track records in community relations, board and executive compensation and independence, and environmental issues.
Read the rest of Michael’s contribution on the Forbes site (his is the final one in the list). As always, it’s rewarding to see our approach getting some notice in the mainstream financial press!
With the world’s attention focused on the COP21 climate talks in Paris, there are encouraging signs that the business world is ready to get fully on board and become as much a part of the solution as the problem. Conservation International’s CEO Peter Seligman is encouraged:
If we are going to meet the challenges of a changing climate, we must accelerate nature-based solutions with deep involvement by the business sector. I am optimistic, because I see many companies recognizing that climate change is an economic issue — it affects sourcing, logistics and global markets. Sustainability is no longer an afterthought. It is an integral part of corporate operations and supply chains.
Meanwhile, Jeremy Leggett at Winning the Carbon War reports from Paris that “fully a thousand mayors announced that their cities were pledging to 100% renewable power targets” and that institutional commitments to fossil fuel divestment jumped by over 25% in just the past ten weeks. Even more encouraging is a move by the G20 countries to form a Task Force on Climate-related Financial Disclosures (TCFD) charged helping financial markets get a better handle on rapidly increasing climate change risks. It will be chaired by Michael Bloomberg, who laid down the gauntlet:
Alex Steffen recently gave a keynote talk at The Nature Conservancy’s annual trustees meeting that could serve as a statement of purpose for the Dreamers and Drivers among us who continue to believe that we can find our way through the eye of the historical needle. It’s in the form of a talk to a conservation gathering a hundred years from now, looking back:
We’ve lost so much. We came far too close to losing nearly everything. If things went on as they were, we might have.
Instead, we live today on a healing planet. Yes, much has been lost, but much was saved or restored or reinvented, and what was saved and healed and made anew has become a powerful legacy.
Those gifts became the seedbeds from which sprouted our new world. That we have so much left from which to coax a long and bountiful tomorrow is no accident. Those seeds of hope were saved and planted and tended to by people who made the decision that they would live as if the future mattered. As if nature mattered. As if we mattered.
These were visionary people. Responsible people. Courageous people. All around the world, our best ancestors took up the challenge of leaving a different, bolder legacy, one not of error and loss, but of leadership, stewardship, innovation.
Take five minutes to soak in Steffen’s vision of how we became the ancestors who, “when they understood the planetary crisis they faced, their answer was not cynicism or surrender, but to seek out others and together meet that crisis with action.” It’ll perk you up for another day of doing what we can today to assure that our descendants have a future worth living in. (That final link is another compelling essay, in which Steffen makes the moral case for not giving in to despair.)