Sustainable Investing Basics
What is sustainable investing?
Sustainable investing refers to a range of strategies in which investors include environmental, social and corporate governance (ESG) criteria in investment decisions and investor advocacy. Examples of ESG criteria can be found here.
Sustainable Investment Assets in the United States: The US SIF Foundation’s 2022 Report on US Sustainable Investing Trends identified $8.4 trillion in US-domiciled assets under management (AUM) as of year-end 2021 using sustainable investing strategies. Learn more here.
Motivations: There are several motivations for sustainable investing, including personal values and goals, institutional mission, and the demands of clients, constituents or plan participants. Sustainable investors aim for strong financial performance, but also believe that these investments should be used to contribute to advancements in social, environmental and governance practices. They may actively seek out investments—such as community development loan funds or clean tech portfolios—that are likely to provide important societal or environmental benefits. Some investors embrace sustainable investing strategies to manage risk and fulfill fiduciary duties; they review ESG criteria to assess the quality of management and the likely resilience of their portfolio companies in dealing with future challenges. Some are seeking financial outperformance over the long term; a growing body of academic research shows a strong link between ESG and financial performance.
Terminology: Just as there is no single approach to sustainable investing, there is no single term to describe it. Depending on their emphasis, investors use such labels as: “community investing,” “ethical investing,” “green investing,” “impact investing,” “mission-related investing,” “responsible investing,” “socially responsible investing,” and “values-based investing,” among others.
What strategies do sustainable investors use?
Traditionally, sustainable investors have focused on one or both of two strategies. The first is ESG incorporation, the consideration of environmental, community, other societal and corporate governance (ESG) criteria in investment decision-making and portfolio construction across a range of asset classes. Approaches to ESG incorporation include positive/best-in-class screening, negative/exclusionary screening, ESG integration, impact investing and sustainability themed investing. An important segment, community investing, seeks explicitly to finance projects or institutions that will serve poor and underserved communities in the United States and overseas.
The second strategy, for those with shares in publicly traded companies, is filing shareholder resolutions and practicing other forms of shareholder engagement. Sustainable investing strategies work together to encourage responsible business practices and to allocate capital for social and environmental benefit across the economy.
Who are sustainable investors?
Sustainable investors comprise individuals, including average retail investors to very high net worth individuals and family offices, as well as institutions, such as universities, foundations, pension funds, nonprofit organizations and religious institutions. There are hundreds of investment management firms that offer sustainable investment funds and vehicles for these investors.
Practitioners of sustainable investing can be found throughout the United States. Examples include, but are not limited to:
- Individuals who invest—as part of their savings or retirement plans—in mutual funds that specialize in seeking companies with good labor and environmental practices.
- Credit unions and community development banks that have a specific mission of serving low- and middle-income communities.
- Hospitals and medical schools that refuse to invest in tobacco companies.
- Foundations that support community development loan funds and other high social impact investments in line with their missions.
- Religious institutions that file shareholder resolutions to urge companies in their portfolios to meet strong ethical and governance standards.
- Venture capitalists that identify and develop companies that produce environmental services, create jobs in low-income communities or provide other societal benefits.
- Responsible property funds that help develop or retrofit residential and commercial buildings to high energy efficiency standards.
- Public pension plan officials who have encouraged companies in which they invest to reduce their greenhouse gas emissions and to factor climate change into their strategic planning.
What are some of the segments of sustainable investing?
Registered Investment Companies: Hundreds of registered investment companies, which consist of mutual funds, variable annuity funds, ETFs and closed-end funds, consider ESG criteria in making investment decisions. The US SIF Foundation identified 645 registered investment companies with $1.2 trillion sustainable investment AUM in 2022, including 444 mutual funds and 177 ETFs.
Alternative Investment Funds: In 2022, the US SIF Foundation identified 383 alternative investment vehicles, including private equity and venture capital funds, hedge funds, and real estate investment trusts (REITs) or other property funds, managing $762 billion in AUM that considered ESG criteria.
Community Investments: Community investing institutions include banks, credit unions, loan funds and venture capital funds that are certified and overseen as community development financial institutions (CDFIs) as well as credit unions not certified as CDFIs but with the mission of serving lower income communities. According to the US SIF Foundation, at the beginning of 2022 there were 1,359 community investment institutions with $458 billion in AUM. Community development credit unions constitute the largest group of community investing institutions in asset-weighted terms, with $350 billion across 592 institutions.
Visit our Fast Facts to learn more about these and other segments within sustainable investing.
How do sustainable investment funds perform?
Sustainable investing spans a wide and growing range of products and asset classes, embracing not only public equity investments (stocks), but also cash, fixed income and alternative investments, such as private equity, venture capital and real estate. Sustainable investors, like conventional investors, seek a competitive financial return on their investments.
A number of studies have found that that investors do not have to pay more to align their investments with their values, or to avoid companies with poor environmental, social or governance practices. Studies with such findings have come from Oxford University, the Global Impact Investing Network, the Morgan Stanley Institute for Sustainable Investing, Nuveen TIAA Investments and Deutsche Asset & Wealth Management, among others. For example, in a study by the Morgan Stanley Institute for Sustainable Investing of ESG-focused mutual funds and ETFs, it found that there is “no financial trade-off in the returns of sustainable funds compared to traditional funds, and they demonstrate lower downside risk.” Moreover, during a period of extreme volatility, the study found “strong statistical evidence that sustainable funds are more stable.”
Learn more about the competitive performance of sustainable investment funds.
What is Shareholder Engagement?
Owning shares in a company gives investors a channel through which to raise environmental, social and corporate governance issues of concern. By filing or co-filing advisory shareholder resolutions at US companies, which may proceed to a vote by all shareholders in the company, active shareholders bring important issues to the attention of company management, often winning media attention and educating the public. Moreover, resolutions need not come to a vote to be effective. The process of filing often prompts productive discussion and agreements between the filers and management that enable the filers to withdraw their resolutions.
From 2020 through the first half of 2022, 154 institutional investors and 70 investment managers collectively controlling a total of $3.0 trillion in assets at the start of 2022 filed or co-filed shareholder resolutions on ESG issues. Investors filed more than 750 resolutions relating to environmental, social and governance issues for the 2022 proxy season.
The leading issue raised in shareholder proposals, based on the number of proposals filed from 2020 through 2022, was on ensuring fair workplace practices, and particularly on ending de facto discrimination based on ethnicity and sex. From 2020 through mid-2022, investors had filed a total of 311 proposals on these fair labor issues. Investors also focused on disclosure and management of corporate political spending and lobbying. Shareholders filed 288 proposals on this subject during this period. Continuing a trend of several years, many of the targets were companies that have supported trade associations that oppose regulations to curb greenhouse gas emissions.
In addition to filing or co-filing shareholder resolutions, investors can also actively vote their proxies, engage in dialogue with corporate management or join shareholder coalitions as a means to encourage companies to improve their environmental, social and corporate governance practices. In addition, investors can participate in public policy initiatives, working with government regulatory agencies, and testify and report on ESG investment issues to Congress.
A few of the many examples of how shareholder resolutions make a difference can be found here. To learn more about the impact that sustainable and responsible investors have had on companies, the investment industry and public policy, see The Impact of Sustainable and Responsible Investment.