Organizations join forces through sustainable investments
Growth drivers: Sustainable mutual funds in 2020 saw inflows of $ 51.1 billion, double the inflows of 2019 and almost ten times the inflows of 2018, according to a 2021 Morningstar report. Of all net flows to equity and bond funds in 2020, sustainable investment mutual funds accounted for about a quarter of all flows. Several factors have likely caused such a large increase, including the pandemic, changing views on climate change, social movements and a new president and administration. Fund flows are not expected to slow anytime soon. Deloitte estimates that by 2025, in the United States alone, half of all assets under management will have some type of ESG mandate.
Institutional investors have also contributed to the acceleration of sustainable investing, a change that has received wide publicity even more than that of retail investors. According to the US Sustainable Investing Foundation’s 2020 Report on Sustainability and Impact Investing Trends in the United States, institutional assets represent 70% of sustainable investing assets. Institutions have made their voices heard on these changes, including the Norwegian sovereign wealth fund which announced the sale of all fossil fuel assets representing $ 13 billion of its $ 1,000 billion fund. New York State’s $ 500 billion pension fund has announced that it will divest its oil and gas holdings over four years. This momentum among institutional investors is unlikely to slow, as trustees, shareholders and boards of directors ask more questions about what companies are doing to solve sustainable investing issues.
Climate change is a cornerstone of the policies of the Biden administration, both economically and environmentally. Biden created a specific climate change position in his cabinet to address this issue. In January 2021, Biden issued an executive order establishing climate considerations as an essential element of US foreign and national security policy; demands that the US government use its purchasing power to effect positive change; and plans to rebuild US infrastructure for a sustainable economy. Additionally, the US Department of Labor makes it easier for 401 (k) plans to invest in sustainable investment funds. These initiatives, focused on climate change, should support sustainable investment.
Clearstead’s approach: ESG principles are increasingly integrated into investment programs. ESG considerations are categorized into three main investment strategies.
This continuum ranges from exclusion screens, which ensure that investments are not made in unacceptable activities; ESG integration, which uses sustainable factors to proactively evolve a portfolio towards desirable attributes; impact investing, which makes direct investments in assets that generate acceptable financial returns and positive social or environmental effects.
Institutions such as the MetroHealth Foundation have started to formally integrate ESG factors as part of their investment philosophy and manager search process. Each manager goes through a rigorous selection process and receives a sustainable investment score based on our assessments.
Navigating towards sustainable investing approaches can be a complicated process that must take into account investment objectives as well as organizational and financial priorities.
Sustainable investing is not a fad and will continue to grow. However, it is still in its infancy and can be difficult to implement. According to US SIF, there are 836 registered mutual funds and ETFs with sustainable mandates. There are also many private strategies that incorporate ESG factors. Deciding which strategies best fit an institution’s values can be daunting. Clearstead’s experience and commitment to sustainable investing can help clients embed values and goals into their portfolios. As more sustainable investment options become available and become widespread, companies will be incentivized to impose a higher ESG standard in their business practices.
In 2020, Clearstead partnered with the MetroHealth Foundation to integrate sustainable investing into its investment program. This collaboration has enabled Clearstead to pursue prudent investment management and the MetroHealth Foundation to achieve its investment goals while aligning the portfolio with the Foundation’s broader mission.