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March 06, 2013

What Is the Real Financial Impact of Sustainable Investment?
    by Robert Kropp

Cary Krosinsky of the Network for Sustainable Financial Markets produces a white paper that argues the actual amount of assets devoted to sustainable investment strategies is considerably lower than reported by the world's largest sustainable investment forums. -- One of the first orders of business for the recently formed Global Sustainable Investment Alliance (GSIA)—a collaboration of the world's seven largest sustainable investment forums—was the production of a report assessing the state of sustainable investment on a global scale.

The Global Sustainable Investment Review 2012 found that at least $13.6 trillion worth of professionally managed assets—or 21.6% of total assets—are incorporating environmental, social, and corporate governance (ESG) concerns into investment selection and management. A closer look at the numbers reveals that negative or exclusionary screening—hardly the investment strategy required to usher in a low-carbon economy and reduce unsustainable overconsumption of the earth's resources—remains by a considerable amount the most commonly used approach.

As Cary Krosinsky, the Executive Director of the Network for Sustainable Financial Markets (NSFM), wrote in his foreword to Evolutions in Sustainable Investment: Strategies, Funds and Thought Leadership, "Take a purely values-based approach, and you risk missing the very same practical opportunities in eco-efficiency and innovation, where the sustainability we require will come from."

Taking an even closer look at the numbers published by GSIA, Krosinsky recently produced a white paper entitled The State of Ownership, which questions whether the practice of sustainable investment is as robust as has been reported.

According to the white paper, the actual amount of assets invested in global public equity portfolios through sustainable strategies is only $1.5 trillion. "This figure represents less than 5% of the US$32T managed by signatories to the UN Principles for Responsible Investment (PRI) and approximately 1% of global assets under management overall," Krosinsky writes.

Krosinsky also noted "a breakdown in this $1.5T emerging between negative and positive strategies, with only $400B in funds seeking to find best performers by sector or in general from sustainability factors."

In the US, where the 2012 Trends Report of US SIF: The Forum for Sustainable and Responsible Investment reported that assets totaling $3.74 trillion were devoted to sustainable investment strategies, Krosinsky found "at most $100B in managed portfolios applying ESG factors actively."

Krosinsky does not go into much detail about the gap between the GSIA analysis and his own—instead, he invites interested readers to contact NSFM to learn more about it—but apparently the difference is in how the assets of large pension funds that deploy at least some ESG strategies in their investments are counted. Observing that Norges Bank and CalPERS have recently undertaken initiatives that should add to the amount of assets invested in sustainability, he writes, "Both Norges Bank & CalPERS are largely invested in the status quo as is, and so they do not get added significantly to our figures on presently invested assets making active or passive decisions on ESG factors."

At a board meeting held in November, CalPERS announced that it would buy additional shares of stock in companies with which it engages on ESG issues, a strategy based on findings that engagement by long-term shareowners on ESG issues can lead to improved corporate performance and higher share prices.

"Engagement strategies are extremely important," Krosinsky writes. "In fact we intend on producing a separate analysis on the ROI of Engagement (which we suspect is higher than believed)."

An analysis of global public equity ownership suggests the challenges to the uptake of sustainable investment strategies at the scale required. The analysis reveals that ownership by high and ultra-high net worth individuals account for 27% of the total. Mutual funds account for another 22%, and pension funds 20%.

"Any changes to the status quo will be challenging given the systemically diffuse nature of ownership," Krosinsky writes.

"Asset owner collaboration at scale on these issues has the potential to start moving companies to improve their performance in a race for capital," he continued. "It will likely require collaboration across asset owner groups including not only pension funds, but also the very wealthiest individuals and families around the world to achieve a meaningful consensus."

"There is great urgency to drive the sort of change that sustainable investors seek, but…the present state of affairs is not working to affect that change," the white paper concludes. "It is of the most urgent importance to recognize this and figure out what we need to instead to bring about the changes we seek (and likely require) for the sake of our survival, resilience, health & economic wellbeing."

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