A Striking Rise in the Growth Rate of Responsible Investment

Record Levels of Interest in Responsible Investing Continues

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These are truly exceptional times for the Responsible Investment (RI) movement. RI refers to the integration of environmental, social, and corporate governance (ESG) criteria into the selection and management of investments. Skeptics may dismiss that statement as hyperbole. Others may opine that we’ve heard it all before. But numbers don’t lie. There are now well over a thousand signatories of the Principles for Responsible Investing (PRI), a UN-supported organization.

Those signatories now collectively have $60 trillion of assets under management (AUM), up from $4 trillion at the PRI’s launch in 2006. 94% of signatories recently had a responsible investment policy in place, covering a range of asset classes, not just equities.

As of the end of 2013 RI AUM in Canada had exceeded $1 trillion for the first time, a 68% increase in two years, according to a survey conducted by Canada’s Responsible Investment Association (RIA).

The most common RI strategy is corporate engagement and shareholder action, an approach whereby shareholders enter into a conversation with management and the board in an effort to influence their strategy and decisions. The top three issues in which shareholders engaged companies in 2013 were executive compensation, human right issues, and greenhouse gas emissions. The second most popular strategy was ESG integration, whereby investors incorporate ESG analysis into their asset allocation and security selection process.

More importantly, the rate of growth has been accelerating over the last two years. The question is why?

Could it be an increased recognition of the reality and risk of climate change as embodied by the increasing frequency of extreme weather events such Hurricane Sandy, droughts, floods, and rising sea levels?

Or perhaps it’s driven by investors’ concerns about rising income inequality that might lead to social unrest and adoption of populist policies (witness the recent election of a far-left socialist party in Greece or the rise of anti-immigrant far-right political parties in Europe), both of which would pose threats to corporate profits and thus reduce investors’ returns. Institutional investors may have also finally recognized that corporate governance not only matters but that they can increasingly have a say in making sure that the firms they invest in are well governed. In truth, it matters less why than the fact that a critical mass of investors appear to have reached the conclusion that RI is an investment approach with strong appeal.

An important driver of RI growth is the increasing recognition that ESG issues should essentially be tackled from a risk management perspective. Stephen Kibsey, VP for Equity Risk Management at the Caisse de dépôt et placement du Québec, defines a “sustainable investment” as one with low geopolitical risk, superior ROE, strong free cash flow generation over the long term, low volatility, a strong board, a company that applies and evaluates best practices beyond legal/regulatory obligations for social and environmental issues and is very competitive in its field.

In other words, RI is increasingly being perceived as​ strategic and intelligent investment in strong nimble companies that are best positioned to cope with a competitive marketplace and a changing regulatory environment.

Today it is difficult to find a major company that does not acknowledge ESG in some manner. 95% of S&P 500 companies publish Sustainability Reports. The big four consulting firms have seen major growth in their sustainability consulting services. Major financial institutions such as Goldman Sachs, Citigroup, Morgan Stanley, Royal Bank of Canada, Banco Santander of Spain, and many others have taken significant steps into the RI space. For example, Goldman Sachs, a firm with a successful record of and a reputation for a ruthless pursuit of profits, created GS SUSTAIN in 2007, a fund that invests in stocks that score well on a range of sustainability issues.

GS SUSTAIN had outperformed the MSCI All Country World Index by 43% since the unit’s creation in June 2007 through 2013 year-end. Citi committed in 2007 to investing $50 billion in climate-friendly projects over 10 years. They met that goal in 2013. Two weeks ago, CEO Michael Corbat announced a new $100 billion commitment to finance sustainable growth over the next ten years.

The bottom line is that there is increasing evidence that RI has crossed the threshold into the mainstream. It is no longer a fringe movement that appeals to investors’ values (religious or otherwise) at the expense of monetary value. Ultimately, the success of RI was always going to be in its ability to carve itself a path into the mainstream as a strategic imperative that is a fundamental driver of shareholder returns. In other words, the RI movement’s ultimate success lies in eliminating its raison d’être by becoming the embodiment of mainstream investing.

The day that nobody talks about RI anymore, that goal will have been achieved.