Managers stop calling some assets ESG ahead of SEC rules

Anti-greenwashing proposals are already having an effect, results of a US SIF survey suggest

Investment professionals appear to be rethinking the assets they consider ESG amid anti-greenwashing proposals this year from the SEC.

The total amount of money that US asset managers and institutions call ESG is just half of what it was two years ago, going from $17.1trn in 2020 to $8.4trn this year, according to results of a report today from US SIF Foundation. During that time, the percentage of total assets considered ESG dropped from roughly 33% to 13%, in part because the group changed the survey methodology, precluding some assets from being included as ESG.

That change doesn’t mean that the assets are being managed differently than in the past. Another factor is that managers appear to be wary of running afoul of regulators, with the SEC’s fund naming and marketing rules likely to be finalized next year.

“The SEC proposals came out at the time the survey was open. We had money managers contact us and bring up the SEC issue and ask questions,” said Farzana Hoque, interim head of research at US SIF, The Forum for Sustainable and Responsible Investment. “We saw a decline. Multiple money managers reported lower AUM than they did in 2020. And we think this is in response to the SEC proposals and money managers trying to be more circumspect or cautious in how they report.”

The report counts assets that have ESG factors incorporated in their management as well as those that are connected with shareholder resolutions. The methodology change applied to investors that claim to apply ESG integration across their firms but do not provide concrete examples of investment decisions, and those assets were not counted.

The $8.4trn considered ESG in the report represents 12.6% of the $66.6trn in professionally managed assets in the US as of the end of 2021.

“I don’t think that they are pulling back. A lot of these institutions didn’t say that their [ESG] AUM was now zero – they went from classifying all of their AUM as ESG to just including specific funds and vehicles,” Hoque said.

New priorities emerge

Of the $8.4trn in ESG assets, $6.6trn was from institutional investors that apply ESG integration to their strategies. Another $916bn was from retail investor assets at money managers, and another $3trn were assets involved in ESG-themed shareholder resolutions. Of that roughly $3trn, $2.2trn in assets were also in ESG-integration investment strategies, according to the report.

Among money managers specifically, ESG-integration assets represented $5.6trn, down from $16.6trn in US SIF’s 2020 report. Of the ESG assets, ETFs grew to represent the biggest subset of 1940 Act vehicles, at $613bn among 177 ETFs, while mutual funds were $590bn among 444 funds, with an additional $22bn in variable annuities. Another $762bn was held in alternatives and $186bn in commingled funds. However, nearly $3trn of ESG assets overseen by money managers was in undisclosed investment vehicles, US SIF found.

The biggest ESG issue for money managers was climate change, applying to $3.4trn in assets, followed by general environmental concerns, at $3.3trn. Behind that were general governance issues, at $3.1trn, and social issues, at $3trn.

Other leading issues were around weapons ($1.8trn), tobacco ($1.7trn), fossil fuel divestment ($1.2trn), anti-corruption ($1trn) and human rights ($1trn), according to the report.

Unlike money managers, institutional investors reported an increase in the total assets they consider ESG integrated, going from $6.2trn in the 2020 report to $6.6trn this year.

Most of the assets apply considerations to social issues, although climate change and carbon emissions became the top issue for the first time this year for institutions, according to US SIF.

Climate change as the top priority for $4trn of those assets, followed by conflict risk ($3.3trn), board issues ($2.9trn), natural resources ($2.8trn), tobacco ($2.7trn) and executive pay ($2.6trn).

Why they integrate ESG

Despite the preponderance of money managers noting that ESG issues can be financially material to investors, only 58% said they apply ESG considerations because of fiduciary duty. Similarly, 49% of institutional investors said that fiduciary duty was their reason.

For money managers, the top reasons for considering ESG were mission (83%), client demand (79%), risk (79%), returns (71%) and social or environmental impact (70%).

For institutions, the leading reasons were mission (92%), social or environmental impact (88%), risk (57%) and returns (41%).