The Promise of Sustainable Investing
Among the many entities and organizations occupied in the field of environmental, social and governance (ESG) investing, the Forum for Sustainable and Responsible Investment, also known as U.S. SIF, works to advance sustainable and impact investing across all asset classes.
PLANADVISER Digital Managing Editor John Manganaro interviewed Michael Young, manager of education programs for U.S. SIF, to learn about the organization’s evolving mission. Young discussed how the organization works to expand the number of firms and financial professionals utilizing sustainable and responsible investment (SRI) practices and to clear up misinformation to thereby help advisers and their clients understand the promise of sustainable investment programs.
PLANADVISER: Please describe your recent experience working on ESG and SRI advocacy, given the wider ground-shift that seems to be happening with respect to environmental and social justice advocacy.
Michael Young: There’s a clear and growing demand for educational tools and resources that can help advisers, money managers and asset owners to embrace sustainability and corporate social responsibility. I joined U.S. SIF in the fall of 2016 after a career of working predominantly for asset managers in the U.S., and since then I’ve worked to create new course materials that will help advance our field.
We have coached hundreds of Chartered SRI Counselor [CSRIC] designees in the two years we’ve been offering the program.
Looking back over the past decade, there’s been significant development and an evolution in the lexicon—not to mention an explosion in investment products focused on sustainability and corporate social responsibility, along with using such labels. A decade ago, the general public had much less knowledge of this topic, though it was certainly out there in some circles. Today, we don’t have to explain everything we’re talking about and start the conversation from scratch.
PA: Do you think the U.S. investment world is catching up to this point of view?
Young: Yes. And there’s no time to waste when it comes to addressing the challenge of a warming climate. From the public policy perspective, it’s gratifying to see that global, coordinated governmental action is on the table, in a way we haven’t seen before. We’ll have to wait and see how effective the [Paris Agreement] ends up being, but there is clearly more interest in this area today, [versus] when we put together our mission statement and goals.
Looking at the U.S., in particular, so much power is wielded through institutional asset owners and their advisers. Advisers should understand that they really can make a big difference in addressing climate change and social justice issues. Our perspective is that taking action now is critical.
PA: How else has ESG investing evolved?
Young: When we first were putting together our early ESG trends reports—to simply look at the size of this field—much of our work was focused on equities. In the last six or seven years, though, more and more research is coming out to apply ESG criteria across all asset classes. This is a great thing, and I’m talking about more than just green bonds. We’re seeing the development and application of sophisticated ESG criteria and investment methodologies. This includes in private equity, in hedge funds and in other alternative vehicles.
For the investment management and advisory community, the step we’re taking now is to take the huge amount of data available and distill it into information that’s useful in our investment process. The emerging question is, how do we integrate and utilize this ESG data? There are really amazing opportunities at hand, and I believe our ambitious vision and mission is within reach. Five or 10 years ago, all of this felt much more abstract and aspirational.
PA: Climate action is clearly pressing, and there are other areas where there’s no time to waste, namely the promotion of racial equity and gender equity in the workplace. Do you see more rapid progress being made on these issues today?
Young: My personal impression is that the rate of adoption of ESG principles, both as a means to improve investment outcomes and to promote more equitable corporate policies, is accelerating.
Given everything we have seen play out in the last several years, the climate and issues of inequality are a focus for more and more people, across more and more parts of their lives. Ultimately, the barrier to entry for this entire conversation has gone down, and that’s great. Today, more investors know that ESG issues include—along with climate change—systemic racial inequality, human rights, equal employment and diversity, sustainable agriculture, executive pay and much more. During the pandemic, more people have spoken out on the interrelated coronavirus and social injustice crises.
Our members are successfully challenging the assumption that short-term shareholder return is the key relevant outcome for companies, and they’re advocating to focus on a broader group of stakeholders.
PA: Let’s talk about the importance of adviser training and education on this topic.
Young: Over the course of many years, we at U.S. SIF realized that, first, we had a serious challenge with financial literacy in the U.S., and secondarily, we had a lot of member organizations that didn’t know how to begin the discussion about ESG with their clients. So, we saw a dual role for U.S. SIF: We needed to create simple tools and a framework that the average person could understand and utilize while learning about ESG. This became our free online course for novice individual investors. Today, there’s a course on our website that can be a great resource for advisers to share with their clients, if they’d like a way to kick-start this conversation.
The rest of what we do is catering to financial professionals. For the adviser, the “Fundamentals” course demonstrates how the ESG discovery process is important. We explain how you can ask your clients where they might spend philanthropic dollars and how this might uncover the social issues most interesting to them. Perhaps they support a food bank or are drawn to issues about affordable housing or health care in their community. The adviser can help the client see the different avenues and areas to care about. At the same time, our course work helps advisers understand how to implement and pursue ESG goals in today’s market.
PA: And what does it take to earn the CSRIC designation?
Young: I’d compare it to a graduate level course. It’s meant to be comprehensive, looking back at the history of ESG, and then diving into the modern era, which started with the global divestment from South Africa during the Apartheid era to the ESG disclosure mandate from the U.S. Securities and Exchange Commission [SEC].
We discuss the ERISA [Employee Retirement Income Security Act] fiduciary standard and the considerations about portfolio construction in the retirement planning context, as well as how to analyze and integrate ESG data sources and to understand the different rating methodologies that firms use. When you finish, you’ll have an expertise that will be really useful as this marketplace develops.
Art by Marine Coutroutsios