Finance Sector Discovers Social Purpose
We may be heading into the cold, dark days of winter, but my inbox has been glowing red-hot with a blast of news about sustainable finance. Updates are coming from every area of the category, from giant global entities to funds offering niche investment products, and services aimed at millennials and women. The volume and the variety of this news demonstrate that ESG-driven metrics are now becoming widely accepted as material factors in mainstream investment decision-making. Investing for/with a purpose is on a meteoric rise, with big implications for public companies taking public positions on social and political issues.
Once again, it’s BlackRock CEO Larry Fink who has appeared as the socially responsible investment oracle. Almost a year after his “paradigm shifting” letter--a call for social purpose in the 4,000+ companies in which the $6.3 trillion fund invests--Fink has issued a definitive follow-up statement on the subject. Speaking at a New York Times DealBook conference, he marked another “inflection point”: “I do believe that the demand for ESG is going to transform all investing. That may be one or five years away from now, but it’s not that far away,” he said.
When asked whether his comments were “just” PR, and if business should be involved with issues beyond the bottom line, Fink responded, “I’m not a nanny. I’m not telling companies what their purpose should be. But I do believe it’s up to the company to identify what their purpose is.”
That’s a cosmically huge claim—“to transform all investing”—but when the chief executive of the world’s largest investment entity says it’s going to be so, there’s a good chance it’s an accurate prediction. And it’s clear—again—that Fink believes a company should have a purpose beyond a bare bones, numerical P & L, whatever that social good mission might be.
In a small but telling walk-the-talk example of a buy-in, BlackRock Real Assets has partnered with CleanCapital to acquire 60 operating solar projects in a transaction valued at $120.9 million. This acquisition was managed through CleanCapital’s diligence software platform and supported by BlackRock funds. “Investors are increasingly interested in the investment opportunities presented by the rapidly changing clean energy space, and we’re pleased to invest in solar assets that are well-positioned to capitalize on those trends,” said David Giordano, managing director and head of renewable power, Americas and APAC at BlackRock. With this example leading the way, you can bet on more partnerships between large investment firms and up-and-coming innovators in the renewable energy field.
Other numbers tell the story of the rapid growth in mainstream capital now flowing into sustainable investing. The U.S. SIF Foundation's 2018 Biennial Report on U.S. Sustainable, Responsible and Impact Investing Trends, just released, found that sustainable, responsible and impact investing (SRI) assets now account for $12 trillion—or one-in-four dollars—of the $46.6 trillion in total assets under professional management in the U.S. This represents a 38 percent increase over 2016. Here are some additional highlights by the numbers:
- Much of this growth is driven by asset managers, who now consider environmental, social or corporate governance (ESG) criteria across $11.6 trillion in assets, up 44 percent from $8.1 trillion in 2016.
- From 2016 through the first half of 2018, 165 institutional investors and 54 investment managers controlling $1.8 trillion in assets under management (AUM) filed or co-filed shareholder resolutions on ESG issues.
As the report outlines, the massive sums now moving into various areas of social finance are having a profound effect on the investment market. The survey covered a large swath of activity: 496 asset owners, 385 asset managers, and 1,145 community investing financial institutions.
The latest data from research and index firms adds to this numerical momentum. A new report from MSCI examines the extent to which ESG scores move equity prices up and down: “MSCI ESG score upgrades lead to higher valuations, and downgrades to lower valuations.” And further, these valuations are directly connected to ESG ratings: “A change in a company’s ESG profile has had an impact on valuation levels and stock price that is not explained by the general market conditions or other factors.”
Another research and analysis firm, Sustainalytics, has launched what it calls a “next generation” rating: the Sustainalytics ESG Risk Ratings.These scores are “designed to help investors identify and understand financially material, ESG-related risks within portfolio companies and how they might affect long-term investment performance.” The Risk Ratings universe covers 9,000 public and private companies, expanding to 10,000 by early next year. Note: Earlier this year, Yahoo Finance began to include Sustainalytics’ ESG scores for over 2,000 companies.
Another feature of this expanding landscape is the introduction of products and services targeted at specific demographics. Swell Investing, a SRI platform, grandly announces “The Next Wave of Socially Responsible Investors” with a new study: “Money Meets Morals.” It finds that “the vast majority of Gen Z investors aged 18-24 (84 percent) are either already invested in socially responsible or impact investments, or plan to invest in the future. The study gathered insights from more than 2,000 US adults aged 18 and up, among whom over 1,400 have investments. It concludes that for “a majority of Gen Zers and millennials, politics, environmental concerns, and a sense of responsibility drive their investment interests.” Swell then invites readers of the report to “start investing.”
In the year of #MeToo, it’s hardly surprising to find investments in women-focused businesses on the rise. “Femtech,” defined as “a host of technologies and products that are designed for women's health,” is projected to attract venture capital of $400 million this year, up from $100 million five years ago. Estimates are that this subsector’s market size will rise to $50 billion by 2025, according to a study by Frost & Sullivan.
A new, free, online investing tool just launched by As You Sow enables individual and institutional investors to apply a gender lens to mutual fund and ETC investments. Gender Equality Funds screens the specific holdings of about 5,000 of the most commonly-held U.S. mutual funds—including financial giants like Vanguard, BlackRock, and State Street—against a database detailing individual company performance on 12 key gender-equality performance indicators.
As these numbers show, ESG factors are moving mainstream investing toward sustainable finance. For brands taking stands on social, political, and environmental issues, the implications are clear: Values-driven investment is looking for and will find purpose-driven companies to invest in. From here, this shift looks like a solid bet on profits—and a progressive future.