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Sustainability Matters

What to Make of Reports that Assets Invested Sustainably Are Down

Cutting through the noise around a new report from US SIF.

The amount of money invested in sustainable funds in the United States clocked in at $8.4 trillion at the beginning of 2022. That is a steep decline from the $17.1 trillion at the beginning of 2020, the last time that US SIF, the trade organization for the U.S. sustainable-investment industry, reported the data.

The decline reflects a modified data collection methodology as well as a more cautious approach by investment managers to new SEC proposals to require greater transparency around environmental, social, and governance investing.

The $8.4 trillion represents 13% of total U.S. assets under professional management. It counted two main approaches as sustainable investing: ESG incorporation, or applying various ESG criteria in investment decision-making and portfolio construction, as well as filing shareholder resolutions on ESG issues.

While money managers didn’t disclose a specific investment vehicle for the majority of assets, exchange-traded funds beat open-end mutual funds as the largest category in terms of assets. There were 177 ETFs, versus 444 mutual funds.

The change owes to a tightening up in the data collection this year, which includes ESG incorporation assets only if the asset manager clearly reported that it used ESG factors in investment decision-making and portfolio construction. Thus, the numbers aren’t strictly comparable with those from 2020, says Lisa Woll, executive director of US SIF, because of the methodology change.

Survey respondents also reported fewer assets because “they appeared to be taking a more cautious approach in response” to two SEC proposals, one to prevent misleading fund names and another to require greater transparency around how funds consider ESG factors, US SIF said. “In some cases,” US SIF said, the change was “in the magnitude of billions and trillions of dollars.”

“We did see some numbers coming in from large asset managers that were slightly to significantly less than in the past,” Woll said. “We believe that was in direct response” to the new rules. “Many asset managers, from the SEC’s proposal, are fully expecting a set of rules that will require them to be very transparent.”

The asset decline wasn’t caused by the political backlash against ESG in the U.S., which took place in 2022. The asset data reported come from year-end 2021.

The steep increase in ESG integration, or considering ESG factors in the investment process, began in 2014 and continued until 2020. But asset managers weren’t reporting specifics of how they used this strategy. “It was time for us to rethink” the numbers, says Woll, citing the need for accountability and transparency. Then came critiques about greenwashing, in which investors worried that fund managers are making misleading or unsubstantiated claims about the sustainability characteristics and benefits of their investment products. In response, the SEC will require greater clarity.

“Many asset managers seemed to be overstating their ESG commitments in 2020, so US SIF made the decision to tighten up what it considered a sustainable investment,” says Jon Hale, director of sustainability research for Morningstar. “In 2022, squeezed by greenwashing claims on one side and by regulation calling for more specifics on the other, asset managers were a bit more circumspect in what they call sustainable.”

“ESG consideration has become mainstream,” says Alyssa Stankiewicz, ESG manager research analyst at Morningstar. “This is driven by the growing recognition that ESG risks are financially material, and often these funds would not want to be labeled ESG products.”

What else does the report show? Climate change and carbon emissions were the top issues for both money managers and institutional asset owners. For money managers, second was avoiding weapons-related investments, third was avoiding tobacco, and fourth was avoiding fossil fuels. For institutional asset owners, the second-most important issue was avoiding companies doing business in countries of high conflict risk.