Drivers of growth: Sustainable mutual funds during 2020 saw inflows amounting to $51.1 billion, which were double 2019 flows and nearly ten times 2018 flow, according to a 2021 report from Morningstar. Of all the net flows into stock and bond funds in 2020, sustainable investing mutual funds accounted for approximately a quarter of all flows. There were multiple drivers that likely caused such a large increase, including the pandemic, changing views toward climate change, social movements, and a new president and administration. Fund flows are not projected to slow any time soon. Deloitte estimates that by 2025, in the U.S. alone, half of all managed assets will have some type of ESG mandate.
Institutional investors also contributed to the acceleration of sustainable investing, a shift that has received wide publicity, even more than the shift among retail investors. According to the US Sustainable Investing Foundation’s 2020 report on US Sustainable and Impact Investing Trends, institutional assets account for 70% of sustainable investing assets. Institutions have been vocal about these changes, which include Norway’s sovereign wealth fund announcing the sale of all fossil fuel assets representing $13 billion of their $1 trillion fund. The $500 billion New York State pension fund announced that, over four years, they will divest oil and gas holdings. 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 address sustainable investing issues.
Climate change is a cornerstone to Biden administration policies, both from economic and environmental perspectives. 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 U.S. foreign policy and national security; mandates that the U.S. government use its buying power to enact positive changes; and plans to rebuild U.S. infrastructure for a sustainable economy. In addition, the U.S. Department of Labor is making it easier for 401(k) plans to invest in sustainable investing funds. These initiatives, focused on climate change, should be a tailwind to sustainable investing.
Clearstead’s approach: ESG principles are increasingly being incorporated into investment programs. ESG considerations are categorized into three main investing strategies.
This continuum ranges from exclusionary screens, which ensure investments are not made in unacceptable activities; to ESG integration, which uses sustainable factors to proactively move a portfolio toward desirable attributes; to impact investing, which makes direct investments in assets that generate acceptable financial returns and positive social or environmental effects.
Institutions like The MetroHealth Foundation have begun to formally integrate ESG factors as a component of their investment philosophy and manager research process. Each manager goes through a rigorous selection process and receives a sustainable investing rating based on our …….