Sustainable investing grew from a niche style for people who wanted to exclude certain industries to those who aimed to align their portfolios with their values. Now it’s emerged that sustainability itself is a risk indicator worth watching.
Much of that investment style’s growth comes from the advocacy of the US SIF Foundation, the leading organization focused on sustainable investing, and its CEO for the past 16 years, Lisa Woll. At the end of January, Woll will step down.
During her tenure, US SIF has had many successes in advancing sustainable investing. Most recently, the group supported the Department of Labor’s new rule clearing the way for 401(k) retirement plans to offer environmental, social and governance (ESG) features and sustainable investing options.
On Tuesday, the organization released its biennial sustainable investing trends report, which shows sustainable investing accounts for $8.4 trillion in total U.S. assets under professional management, or 13% of the total. Money managers and institutional asset owners cited climate change and labor as the top issues they address in ESG incorporation.
That figure is significantly smaller than 2020’s data in large part due to a change in the methodology the organization used this year. That came primarily in response to the rapid growth of the field and the lack of information from a growing number of institutions on ESG criteria they applied. The new methodology requires more granular information on how respondents use ESG in their funds.
Additionally, compared with their 2020 responses, multiple money managers reported declines in ESG assets under management, which US SIF Foundation believes is a reaction to the Securities and Exchange Commission’s release of a fund disclosure proposal. That proposal requires issuers to provide standardized data to back up claims that the funds’ investments are environmentally friendly and leaders in social and governance issues.
Woll spoke with MarketWatch about how sustainable investing has evolved. She responded to recent attacks on sustainable investing opponents of “woke capitalism,” including some Republican lawmakers, such as Arkansas Sen. Tom Cotton, who says ESG initiatives violate antitrust legislation, and on a state level, such as Florida’s and Texas’ crackdown on ESG investing in state funds.
This is an edited transcript.
MarketWatch: In its modern form, sustainable investing was steadily growing from the 1990s but started to take off by 2004. What were some of the tipping points that pulled it from niche to mainstream?
Woll: When I came to US SIF, it really was socially responsible investing for the most part. Most of the membership — not all of it — was focused on how to use investments to make the world better. That is very much still an important part of the field. When the idea of ESG integration started to come in — this notion that ESG data help us be better investors because it’s about risk and opportunity — that’s when you started to see a lot of the bigger asset management firms emerge, because that was a different conversation. That was a conversation about investment risk and opportunities.
And both of these conversations still exist.
MarketWatch: What are your thoughts on the DOL legislation and the final rule, which explicitly permits retirement-plan fiduciaries to consider climate change and other ESG features when selecting investments or meeting shareholder demands.
Woll: We think this rule is pretty good. We have led on this issue since George W. Bush left office. We focused on three things. First was [providing] clarity around being able to use ESG funds or sustainable investments in ERISA-governed plans. (ERISA is the federal law that sets the minimum standards for most voluntarily established retirement accounts.) The second was the ability to vote proxies on ESG issues. The third was about QDIAs, the Qualified Default Investment Alternatives (the default investment used when money is contributed to a 401k). QDIAs are really important because that’s where a lot of retirement money goes now. They said there is no difference between a fund that uses ESG criteria and one that doesn’t for purposes of QDIA.
The next step for all of us is to help educate folks who are responsible for ERISA-governed plans and ensure they understand the rule.
MarketWatch: Political backlash is growing against sustainable investing, especially in Republican states. What do you think is behind it?
Woll: At one level, this is a very political approach to trying to drive back even the small amount of progress we’ve had in addressing climate in this country. This is a response to funds that are not investing in oil and gas.
What’s really detrimental about this is that I really don’t think state treasurers and state controllers should be using plan participants in their state or local retirement funds as political pawns by saying, ‘well, we’re not going to invest in this. We’re going to pull out of these funds because we don’t like their position on climate or guns or whatever it is.’ As opposed to looking at the realities that, over the long term, these [sustainable funds] are very likely to be better investments.
And in a lot of this, it is just a reaction to an enlarged framework of interest in social and environmental issues. Going after ESG investing is a strategy to at least try to knock out or diminish interest in investing with an environmental view.
There’s a lot of big money behind this, too. Conservative activist Leonard Leo at the Federalist Society is one of the main funders. There are at least two organizations (Consumers’ Research and State Financial Officers Foundation) now who have this as their real political target.
In some ways, this is a moment in time where it’s really clear that the field of sustainable investment has gotten enough weight and ballast that it’s now seen as worth politically attacking.
Also read: USDA’s $2.8 billion for ‘climate-smart’ agricultural projects is a ‘huge step’ in fighting climate change
MarketWatch: ESG has also come under a backlash that it’s greenwashing and can’t solve issues like climate change or have any social impact, with Tariq Fancy, ex-chief investment officer for sustainable investing at BlackRock, calling it out among others. How do you counter those claims?
Woll: He said many times policymakers are not working on issues like climate change because they think sustainable investors are working on it. And I can’t tell you how wrongheaded and data-free that point is.
I really differ with his view, which is that the existence of sustainable investors who work on climate is somehow stopping policymakers from working climate [policy]. There’s no proof of that. An experienced person on Capitol Hill would never tell you that. And I’ve never had a single conversation that even sounded remotely like that.
Of course sustainable investing is not going to fix the climate crisis. It is a strategy to put investments into better types of energy, and to remove in some situations, investment in dirty forms of energy. Nobody has ever said that sustainable investment in and of itself is going to shift frameworks in which the U.S. operates. And you need public policy for that. What sustainable investing does is gives you another tool to address some of these issues through the investment process.
More: Energy transition will be ‘very, very rough’ if governments and businesses can’t get on the same page
MarketWatch: In 2022 we’ve seen the SEC fine Goldman Sachs and BNY Mellon for some of their lax ESG polices or ESG funds. In Germany, police raided Deutsche Bank and DWS over greenwashing allegations. How much do raids and fines affect the perception that ESG investing is greenwashing?
Woll: If you ask actors in the [sustainable investing] field about this, they’re happy that the SEC is doing their job, whether it’s a firm that does have a portion that does sustainable investment or not.
What we are about is credibility, transparency and best practices, period. We have been incredibly supportive of the general idea that there needs to be better disclosure or more disclosure on ESG strategies by funds. (Regarding the SEC’s proposed ESG fund disclosure rule) we have multiple changes that we think the SEC should make from the original proposal. It’s 100% a step in the right direction.
MarketWatch: How can investors know what they’re buying is real?
Woll: There are two kinds of approaches that come under the word ‘greenwashing.’ One is: ‘I saw this fund and I don’t think it’s impactful enough.’ Well, that’s an opinion. But if that fund is actually saying exactly what they do, and they actually do it, that’s not greenwashing. You shouldn’t invest in that fund. You should go find another fund. That’s not greenwashing. Greenwashing is what you say you do, and you actually are not doing that.
MarketWatch: Sustainable investing isn’t going to go away. How do you see it changing?
Woll: In the last three years, since the pandemic, there’s a much greater focus on labor issues, workers issues than we’ve seen in the past. I expect investments in community development financial institutions to continue to grow. They were seen on the frontlines during Covid and responding to racial inequality and other important social issues. Biodiversity has become front and center. There will be more product creativity and you’re going to see more retirement plans include sustainability. The debate will continue over what is the definition of impact, and what is the impact we can expect from different asset classes.