Message from America: ESG investing is a drop in the ocean here, but it’s growing

Ahead of the launch of ESG Clarity US, special projects editor Liz Skinner provides a snapshot of ESG investing in America

In this new regular column, Liz Skinner, special projects editor at InvestmentNews, a sister publication of Last Word Media, will provide a snapshot of the sustainable investing market in the America

Financial advisers in the US have been slower than many American investors to embrace the potential of ESG investing.

For nearly 10 years as a reporter and now editor at InvestmentNews, I’ve encouraged advisers to learn more about ESG, socially responsible investing and impact investing. When investor polls began to show that clients were clamoring for sustainable investment opportunities, InvestmentNews suggested advisers bring it up with their clients.

Through surveys and interviews, however, most advisers over the years said they believed only hippies were interested in ESG and that these types of products would be money losers for their clients. They also admitted that their knowledge of socially responsible investing was low, and they didn’t know where to start to bring themselves up to speed.

The fact that ESG is discussed using so many different terms and concerns about ‘greenwashing’ have all added to their unease with the investing style. But the investing case for ESG has continued to grow.

This year, the Refinitiv Lipper Awards, recognition that is highly sought by US funds, provided more proof that investors aren’t giving up performance by supporting their values. Calvert Research and Management, the $22bn asset manager long associated with socially responsible investing, was the overall winner in the small-company category.

The top large-company winner was MFS Investment Management, the nation’s oldest mutual fund company. It manages around $528bn and for the past two years has been rated as the highest ESG-friendly shop, based on a globe rating system at Morningstar.

Business case

More recently InvestmentNews has taken a stronger tact with financial planners, advising them to start launching into discussions with clients about what societal and environmental causes matter to them, otherwise other advisers will step in and do so.

For advisers who want to be attracting a greater client wallet share, not less, this argument may be helping to attract their attention and increasingly advisers report they are discussing ESG.

Hoping to provide advisers with some of the knowledge they admittedly lack when it comes to discussing values-based investing with clients, last December InvestmentNews hosted a two-day event that included a film festival and more than a dozen experts offering guidance to advisers.  

All signs point to advisers finally getting the message — or at least not rejecting it out of hand. Thus, InvestmentNews this month is introducing to the US financial advice market a resource that the U.K. investing community has come to rely on.

InvestmentNews is launching ESG Clarity US in June. As part of our agreement with ESG Clarity publisher Last Word Media, which will help supply some of the stories to sustain the site, I will provide a monthly column for its readers about the latest ESG developments in America.

To be clear, ESG investing in the US is just a drop in the ocean compared to Europe, but it’s growing.

The US has about 307 sustainable funds, which equals about 9% of the global market, compared to Europe’s 2,528 funds that equal 77%, according to Morningstar data.

In terms of asset value, the US has about 14% of the market with $119bn, compared to Europe’s 81% of the global market with $684bn. But the most interesting stat is found in the first quarter of 2020, when US flows surged.

About $10.5bn flowed into sustainable funds in the US in the three months ending March 31, representing 23% of the new asset flow. Europe attracted 73% of assets flowing into sustainable funds.

Of course, assets flowing into funds at all during the first quarter is news on its own.

Surprisingly, the coronavirus that’s straining the US economy, healthcare system and the patience of the millions of Americans working from home, has built up the case for ESG investing.

Covid-19 impacts

Sustainable investing strategies that focus in varying degrees on ESG issues have emerged as the darlings of the financial markets since the start of 2020, while traditional strategies and broad market indexes have suffered.

During the first quarter of the year, for example, when the S&P 500 Index was knocked off its decade-long bull market perch into bear market territory with a 23.7% decline, funds earning the highest ESG ratings by Morningstar averaged declines of 17.7%.

The performance difference is only partly explained by exposure to energy stocks that have been hammered by declines in oil prices. ESG bonds also have seen a recent surge in issuance.

Analysts are optimistic that ESG momentum in the US is growing as investors are beginning to fully understand the value of applying structural ESG considerations into an investing framework.

Additionally, the social factor is coming into play as the public is scrutinizing more than ever just how firms are adapting to changed operations, observing how well they’ve prepared for such a disruption and looking for potential risks and opportunities.

Next month I will write more about some of the companies that are leading the US sustainable investing market and touch on some of the areas where American tax and regulatory structures have some catching up to do.

Liz Skinner is special projects editor at InvestmentNews, a sister publication of Last Word Media.

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...