"Today our world is changing faster than ever before--economic, geo-political, and environmental challenges abound," wrote Warren Buffett in a recent report. "In times such as these, a company must invest in the key ingredients of profitability: its people, communities and the environment."
More and more investors are following Buffett's lead and widening their perspective beyond quarterly profits. Indeed, sustainable, responsible and impact investing (SRI) assets in the US grew 76% between 2012 and 2014, according to a survey by US SIF. Assets managed by investment firms considering environmental, social and governance (ESG) issues increased more than three-fold, the survey said. US institutional investors, including pension funds, expanded SRI assets by 77%, and assets held by private equity and other alternative investment funds considering ESG factors rose 70%.
At a global level SRI investing continued to expand rapidly as well. The PRI, a group of signatories of six Principles for Responsible Investment, has grown since its inception in 2006 to include over 1260 organizations, accounting for more than $45 trillion in assets under management.
This growth will continue, based on the following trends:
1. SRI investment growth is driven by popular demand. In the US SIF survey, 80% of 119 US money managers who responded to a question on why they offer ESG products said it was in response to client demand. Describing the growth since 2012, the survey cited "growing market penetration of SRI products, the development of new SRI products and the fuller integration of ESG criteria by numerous large asset managers across wider portions of their holdings."
2. Investor focus is evolving, from simply filtering out less desirable products (tobacco, weapons, fossil fuels) or geographical regions to invest in (Sudan), to filtering in more desirable products or behavior (renewable energy, a focus on diversity), to full engagement in corporate strategy (calling for commitments from companies to reduce carbon emissions, or demanding disclosure on political contributions).
3. Strength in numbers: investors are banding together to effect change, notably through the PRI. Last September, nearly 350 global institutional investors representing over $24 trillion in assets issued a statement calling for carbon pricing.
4. Greater transparency: investors are demanding transparency from companies on ESG issues, and more and more, investors are setting an example with their own transparency. More than 780 Transparency Reports by PRI signatories are viewable on the PRI website. Expect to see progress in benchmarking for greater measurability of ESG and financial performance.
5. Investors are pressuring companies to account for externalities, such as global warming-related risks. Accounting firm KPMG recently published a report called "A New Vision of Value: Connecting corporate and societal value creation." KPMG sees the gap between corporate and societal value creation closing, outlines a 6-point agenda for change, and offers a methodology called the "KPMG True Value methodology" to track value creation scenarios beyond just the short term.
6. Investors are turning to local, community investing and impact investing for measurable social impact combined with a solid return on investment. The US SIF survey found that "place-based investing, largely by public funds directing investment into their city or state in targeted strategies, emerged as a new trend, accounting for nearly $90 billion in assets."
Stay tuned in 2015 for a boom in SRI big enough to spread among investments of all shapes and sizes--and effect real change. This will set off a virtuous cycle, so that eventually no corporation, and no investment fund, will be able to resist being part of the great sustainability movement of the 21st century.