ESG funds set a new record inflow by doubling in 2021

With the onset of the COVID-19 pandemic, Black Lives Matter protests, and rising global temperatures that vied to be the warmest on record, the world has witnessed a slew of extreme changes over the last two years. Along with these upheavals came investors who moved record sums of money into ESG (Environmental, Social, Governance) funds focused on improving the environment and promoting social good.

Investor demand for ESG integration within businesses, increased climate change policies, and a growing cohort of millennials who place greater emphasis on human capital and the environment are all contributing to this shift in money flows.

An estimated $120 billion poured into sustainable investments in 2021, doubling the $51.1 billion captured by ESG funds in 2020 and setting a new consecutive annual record. And this upward trend is set to continue. Morningstar reported the number of sustainable funds available to U.S. investors grew to 534 in 2021, up 36% from 2020. Additionally, in the fourth quarter of 2021, 45 funds were launched in the U.S. with sustainable mandates, the highest number of sustainable funds launched in one quarter.

As ESG funds make new records, it begs the question: how much is the sustainability & ESG market worth today?

How much money is in ESG?

Sustainable investing assets currently total $17.1 trillion, according to the US SIF Foundation's 2020 biennial "Report on US Sustainable and Impact Investing Trends", released on November 16. This represents 33%, or one in three dollars, of the $51.4 trillion in total U.S. assets under professional management. The Global Sustainable Investment Alliance reported in 2021 this number currently could be as high as $35.3 trillion.

Sustainable investing covers a wider investment landscape that considers both financial return and social and environmental good. This investment approach is best defined by the three pillars of sustainability: economic growth, environmental protection, and social progress, also referred to as “people, planet, and profits.” In a nutshell, sustainable investing directs capital to companies fighting climate risk and environmental destruction, while promoting corporate responsibility.

Looking specifically at ESG, the US SIF Foundation identified 530 institutional investors, 384 money managers, and 1,204 community investment institutions specifically using ESG criteria in their investment analysis and decision-making processes, totaling $16.6 trillion in assets under management.

This $16.6 trillion in ESG assets is a nearly 43% increase over the $11.6 trillion identified in 2018. Of this 2020 total:

• $3.1 trillion (19%) was managed through registered investment companies such as mutual funds, exchange-traded funds, variable annuities, and closed-end funds.
• $716 billion (4%) was managed through alternative investment vehicles, such as private equity and venture capital funds, hedge funds, and property funds.
• $266 billion was managed by community investing institutions.
• $985 billion in money manager ESG assets were managed through other commingled funds.

However, the majority ($11.5 trillion, or 69%) remains largely obscure. These funds were managed through undisclosed investment vehicles and the managers for 60% ($6.9 trillion) of these undisclosed vehicles did not disclose the specific ESG factors that they consider, reporting only that they consider ESG in general.

What ESG issues matter most?

The report showed money managers and investing institutions incorporate ESG factors fairly evenly across the environmental, social, and governance categories. Perhaps surprisingly, money managers allocated slightly more to social factors than environmental and governance criteria in asset-weighted terms.

So, what issues matters most?

• Climate change remains the most important specific ESG issue considered by money managers in asset-weighted terms. The assets to which this criterion applies increased 39% by 2020 to $4.2 trillion.
• Anti-corruption was the largest governance criterion, with a growth of 10% from 2018, accounting for $2.4 trillion in money manager assets.
• Board issues also ranked high among the top specific ESG criteria for money managers, affecting $2.4 trillion in assets under management, a 66% increase from 2018.
• Sustainable natural resources & agriculture grew by 81% to $2.4 trillion in assets under management.
• Conflict risk was the largest social criterion at $1.8 trillion assets under management, although this was a decrease from 2018 of 22%.

What ESG issues do institutional investors care about?

The US SIF Foundation reported on 530 institutional asset owners with $6.2 trillion in ESG assets; this accounts for 51% of the $12.01 trillion identified by money managers as institutional assets. Of this $6.2 trillion in institutional ESG assets:

• Conflict risk investment policies were most prominent ESG criterion among institutional investors.
• Climate change & carbon emissions remained the most important environmental issue for these institutions.
• Tobacco maintained a top five spot in ESG criteria for institutional investors.
• Board issues were the most prominent governance criterion; assets allocated to this issue represented a 32% increase from 2018.
• Sustainable natural resources & agriculture ranked as the second most heavily weighted environmental issue for institutional investors and represented a 95% increase since 2018.

What ESG issues do shareholders care about?

In 2021, Morningstar reported that funds focused on ESG-related issues saw their combined assets climb in Q2 to $2.3 trillion for their fifth consecutive quarter of growth, up from $2.1 trillion in 2020. According to US SIF Foundation, the majority of these assets are controlled by 149 institutional investors and 56 investment managers.

So what do these shareholders care about most? The report reviewed filed or co-filed shareholder proposals on ESG issues across two years. The research found:

• The leading issue raised in shareholder proposals was corporate political activity. These resolutions focused on corporate contributions to sway elections or business lobbying to influence legislation and regulations. Many of the companies targeted were those who had backed lobbying groups opposed to legislation that would reduce greenhouse gas emissions.
• Fair labor & equal employment opportunity issues took second, with shareholders filing 228 proposals between 2018 and 2020, which included several resolutions calling for gender pay equity.
• Climate change took third place and saw a surge of proposals as investors weighted the prospects of stranded carbon assets and worldwide efforts to curb greenhouse gas emissions.

Social and environmental issues received higher levels of support as well. For example, during the proxy seasons of 2012-2014, only two shareholder proposals on environmental and social issues that were opposed by management received majority support, while 26 such proposals received majority support in 2018 through 2020.

Investors are also advocating in other ways than filing shareholder resolutions. A subset of survey respondents, including 44 institutional asset owners with more than $1 trillion in total assets and 77 money managers with $7.8 trillion in assets under management, reported that they engaged in dialogue with companies on ESG issues.

Where will ESG go next?

According to Bloomberg, global ESG assets are on track to exceed $53 trillion by 2025, representing more than a third of the $140.5 trillion in projected total assets under management.

While Europe accounts for half of the global ESG assets, the U.S. has seen the strongest expansion this year and may dominate the category starting in 2022. The next wave of growth could come from Asia, particularly Japan.

Moving forward, the pandemic and the green recovery in the United States, European Union, and China will begin to expose how ESG can help evaluate a new set of financial risks and leverage larger capital market opportunities. These shifts will make ESG adoption an even greater mandate for current outliers.

How can companies prepare?

With investors inquiring more and more frequently about what your company is doing in regard to responsible investment, how you treat employees and vendors, your dedication to sustainability initiatives, and other activities that fall under the ESG umbrella, it’s important to have answers to these questions.

An ESG materiality assessment empowers you to easily report on your current state and outline future initiatives while taking into consideration your business goals and risks. Download our guide to creating and extracting the maximum strategic value from an ESG materiality assessment.

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Helee Lev

Helee joined our team in 2012, overseeing strategic account management, new business, and industry alliances. In 2015, she participated in raising $5M of venture capital funding. She leads sales, business development, and Conservice ESG's strategic consulting group.

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