Improved oversight providing a more credible long-term path for ESG
It was a tumultuous year for markets in 2022, as factors including stubborn inflation and Russia’s invasion of Ukraine contributing to turmoil in indexes worldwide. Similar trends have persisted into 2023.
On the surface, the same reality exists for ESG (Environmental, Social, and Governance) funds in the United States, which offer investors the option to grow their money in investments aligned with their values. While all ESG principles communicate different messages about companies, those relating to the environment have taken precedence in the eyes of policymakers in recent years.
Seemingly in keeping with recent turbulence, The Forum for Sustainable and Responsible Investment (US SIF) released a report identifying a decline in sustainably managed assets from $17.1 trillion to $8.4 trillion from 2020 to 2022. From a bird’s eye view, this reduction seems like bad news for the emerging sustainable investment movement; however, public opinion and other factors say otherwise.
Interest in socially responsible investing isn’t declining, as a 2022 Gallup poll found that 63% of American adults with more than $10,000 invested in stocks, bonds, or mutual funds are likely to invest in funds that align with their values. ESG principles are clearly still of emerging interest to American investors.
According to US SIF’s December report, the raw number of managed ESG assets has declined due to anticipation of impending regulation as well as tightening definitions of sustainability and ESG investing.
For example, on the regulatory front, an enhanced version of the Names Rule, – which seeks to ensure that investment companies live up to the name of their fund in practice – is moving through the Securities and Exchange Commission’s rulemaking process. This rewrite would strengthen this rule by requiring any investment fund claiming to focus on characteristics such as ESG or sustainability to invest at least 80% of assets in those categories.
This rule comes in addition to other proposed regulations designed to increase transparency in corporate climate disclosures, which will provide more accurate information to investors and money managers, all the while better equipping ESG investing for long term success.
Similarly, reduced ESG assets came amid increased focus on false sustainability advertising, a phenomenon known as greenwashing, which led associations like US SIF to strengthen standards for what is considered an ESG fund. Stricter scrutiny will give investors a clearer picture of ESG-based funds, ensuring that they actually include sustainable dollars and setting a precedent for truth in advertising in the future.
Even if the short-term effect is declining ESG assets on paper, an honest accounting of sustainability provides a more credible long-term path. By moving toward regulatory certainty and a more accurate definition of ESG, the sky is the limit on how far real sustainable investing can go.
The fact that funds with a deceptive sustainability label have been on the market illustrates the need for more standards and frameworks for disclosures in the U.S. Xenophon will continue to closely monitor government progress on this issue and provide timely updates.
Company ESG stories are critical to your organization’s reputation and bottom line, particularly with the rise in socially responsible buying and investing. Xenophon is available to help craft a compelling narrative for your organization’s ESG story. Check out our website for a free review and consultation.