Climate tops ESG Priorities for US Institutional Investors

US SIF Foundation biennial trends reports smaller share of assets managed sustainably, due to methodology, regulatory changes.

Climate change is the leading issue being addressed by US asset owners that incorporate ESG factors into their investment decisions, according to the US SIF Foundation’s latest biennial Report on US Sustainable Investing Trends.

This is the first time that climate change has been the top criterion for US asset owners, applied to US$3.96 trillion of assets by almost 500 pension funds, insurers, foundations, endowments and family offices.

The second most important ESG issue factored into asset owners’ investment decision-making was avoiding firms doing business in countries of high conflict risk, affecting US$3.28 trillion in assets, having been the most important issue for the previous decade. In the 2022 report, it was followed by board issues (US$2.87 trillion) including director pay, independence and diversity, and sustainable natural resources/agriculture (US$2.79 trillion).

Climate change was also the most important ESG issue for asset managers, addressed across US$3.4 trillion in assets under management. Managers also reported applying fossil fuel divestment screens across US$1.2 trillion AUM, making it the fourth most common criteria. Other priority themes for asset managers incorporating ESG into their investment decisions included avoidance of weapons, tobacco and corruption.

There were also more climate change-related shareholder proposals (265) filed by investors in the two years to mid-2022, compared with the previous period, said the US SIF Foundation. But these were outstripped by growth in proposals relating to fair workplace practices (311). Both environmental and social proposals are winning greater levels of support, it noted.

The research follows a series of political attacks on US asset managers for incorporating ESG factors into their investment considerations, some coordinated by the State Financial Officers Foundation, partly driven by concerns over the impact of transition from fossil fuel dependence on energy costs and jobs.

“We see climate change as a predominant specific factor. Globally, managers with more than US$50 trillion have made net zero commitments via the Net Zero Asset Managers’ initiative. A broad base of US asset managers share this global concern about climate change,” noted Joshua Humphreys, President of the Croatan Institute, speaking at a webinar launching the research.

A subset of 86 asset managers with a combined US$1.3 trillion AUM answered questions on their motivation for incorporating ESG criteria into their investment processes. A total of 71 respondents, representing US$1.26 trillion AUM, cited mission as a key reason, while 50 managers representing US$1.16 trillion AUM cited fiduciary duty.

New methodology, regulations

In its 2022 report, US SIF Foundation recorded a halving in the overall amount of US assets managed sustainably – US$8.4 trillion versus US$17.1 trillion in 2020 – due to a change in methodology and an impending tightening of regulation. The changes mean that around 12.6% of all assets managed professionally in the US – or one in eight US dollars – are managed sustainably.

Ahead of proposed new fund labelling rules by the US Securities and Exchange Commission, US SIF Foundation noted that asset managers were being “more circumspect in what they consider to be assets that incorporate ESG criteria”, leading to “modest to steep” declines in ESG AUM reported, compared to 2020.

In addition, US SIF Foundation’s 2022 report made a new distinction between firm- and fund-level claims to sustainability. For the first time, it did not include the AUM of investors which stated that they practice firm-wide ESG integration without providing further information on specific ESG criteria used in their decision-making and portfolio construction, such as biodiversity or human rights.

Instead, it included only the assets of investors or vehicles that incorporate one or more specific ESG criteria, plus the assets of funds which specify that ESG or sustainability is integral to its decision-making or portfolio construction.

This methodology led to US SIF Foundation reporting US$7.6 trillion in US-domiciled AUM as incorporating ESG criteria, with the total level of sustainably managed assets rising to US$8.4 trillion once assets of investors and managers engaged in shareholder advocacy were added, and overlaps eliminated.

US SIF said the reduced ESG AUM reflected asset managers largely adjusting to its new methodology, reporting only assets in funds with specific ESG objectives, rather than pulling back from offering sustainable investment solutions.

“We were the canary in the coalmine,” said US SIF Foundation CEO Lisa Woll, noting that asset managers were reporting to US SIF Foundation at the same time as they were digesting the implications of the SEC’s planned changes to fund labelling.

Under US SIF Foundation’s definition, ESG incorporation encompasses a range of strategies including ESG integration, positive screening, negative screening, impact investing and sustainability-themed investing.

The US SIF Foundation conducts educational and research activities to support the mission of US SIF, the Forum for Sustainable and Responsible Investment, which promotes sustainable investment practices in the US, promoting long-term investment and the generation of positive social and environmental impacts.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

Copyright © 2023 ESG Investor Ltd. Company No. 12893343. ESG Investor Ltd, Fox Court, 14 Grays Inn Road, London, WC1X 8HN

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