Dollars as Ballots and the Growth of Sustainable Investing

Apr 22, 2021 David Lawrence Posted in Articles

As we celebrate Earth Day 2021, the world of sustainable investing is undeniably expanding –more investors are becoming aware of its promise, and more money is flowing in. Still, investors have questions: do my investment dollars make a difference? Does Sustainable Investing help bring about change and lead (or force, in some cases) companies to behave in a genuinely more "sustainable" way? And can we still drive for economic growth in the present while making good decisions for our future?

The Good News 

The short answer is yes. Sustainable Investing is bringing about a shift in how companies behave in three ways: more investors are signaling their support of sustainable investments, there is a growing demand for sustainable investing options, and there is more and better reporting of companies’ sustainable efforts.

It’s Not Just a Dollar - It’s a Ballot 

In a 2017 survey, Morgan Stanley reported that more than 70% of investors were "interested in investing along sustainability lines." In 2012, a total of $3.74 trillion was invested under sustainable mandates in the United States; in 2018, there was $12 trillion – a nearly fourfold increase in six years. It is now estimated that one out of every four professionally managed dollars in the United States is invested with consideration for sustainability. Your investment dollars can help influence the corporate world toward change on a broad range of environmental and social issues. Investors are pushing corporations to focus less on short-term and bottom-line only approaches and more on longer-term goals that consider several environmental and social issues. Companies are also moving away from considering only their shareholders, toward representing a broader group of “stake holders,” which includes their employees, customers, local communities, and more broadly, future generations and the planet.

Growth in Investing Options 

As a reflection of the rising demand for sustainable investment options, there has been a significant increase in the number of investment options that both explicitly focus on sustainable investing or at least now "consider" sustainability factors in their decision-making process. There are now more than 300 dedicated sustainability funds in the US alone and another 564 that consider environmental, social, and governance (ESG) factors (up from just 81 in 2018). BlackRock, the world's largest fund manager, announced in early 2020 their strong support of sustainable investing, with a commitment to "place sustainability at the center of our investment approach." Every sustainability fund has its focus and methodology of how it invests and how it votes on behalf of its shareholders. Some funds screen out specific business sectors or types of companies that profit from areas they deem undesirable. This is where much of the sustainability movement began – with funds that excluded companies operating in apartheid South Africa or with religious groups refusing to invest in companies that don’t uphold their core beliefs (like tobacco, alcohol, exploitive labor practices, the manufacture of munitions, etc.).

A Nuanced Approach

Other sustainability funds are more nuanced in their approach. While they might not like a particular sector, they will include companies making material changes to how they operate and plan for a more sustainable future. They focus on best-in-class companies and are more inclusive. However, they can and will exclude any number of worst-in-class companies or sectors they believe do not fit in with the overall vision. Many sustainability funds also vote shares supporting environmental efforts or any number of social issues (e.g., improving hiring and pay practices around racial and gender diversity). Some companies are more explicitly aggressive – they can push ballots to vote on these issues that the board or the company do not necessarily support – or they can be relatively supportive of management and work with them to create change over the longer term. The idea is that if you have a positive relationship with the board and management, you are more likely to get them to accept change over the long term versus a more aggressive approach.

The Broader Ecosystem 

In support of the investment process, a robust ecosystem of nonprofit and for-profit entities has emerged to define and track how well companies engage with their sustainable practices. Organizations such as Sustainability Accounting Standards Board (SASB), Global Reporting Initiative (GRI), and International Integrated Reporting Council (IIRC) are nonprofit organizations that help set uniform and consistent standards on how companies report material environmental information to investors. Thousands of companies now report on  these standards, including almost 95% of the largest 250 companies in the world. The establishment and widespread acceptance of these agencies has led to a dramatic increase in the depth and breadth of information available.