The US market for ESG-related products is less than half the size previously reported, according to the main umbrella organization for sustainable investing.
US SIF Foundation said sustainable assets total about $8.4 trillion this year. That’s down from the $17.1 trillion stated two years ago, with the difference largely due to changes in the methodology used to calculate the numbers. Given the research adjustment, comparing the numbers is like equating “apples and pears,” the industry group said.
Still, the huge drop in the US market for assets that take environmental, social and governance factors into account looks set to play out across the world. That’s as investment firms in Europe start stripping ESG labels from funds amid stricter rules in the region, and as Asian regulators also set stricter standards.
“The market is clearly taking a more critical eye toward the less robust end of the spectrum, leading to a reset both here and in Europe,” said Rob Du Boff, senior ESG analyst at Bloomberg Intelligence in New York.
ESG purists have long called for a reset of the market amid signs the label was being applied far too liberally. The tag has been attached to everything from swaps and other derivatives to repurchase agreements. Some ESG fund managers even held Russian government bonds until shortly before Vladimir Putin invaded Ukraine.
In its new research, US SIF required institutions to submit more “granular information” about their incorporation of ESG issues. Additionally, several money managers reported “a modest to steep decline” in assets tied to ESG factors, which may be linked to the US Securities and Exchange Commission’s push for greater transparency around funds’ consideration of ESG factors, the group said, without identifying the firms.
This year has been “extraordinary” with “multiple regulatory proposals put forward as well as accusations of greenwashing and political attacks by some policymakers,” said Lisa Woll, US SIF’s chief executive officer.
SIF organizations in other regions are doing similar reviews of their methodology, she said during a presentation discussing the latest findings.
US SIF focused on what it calls ESG incorporation strategies to tally up the assets. Those include what the group refers to as ESG integration, positive/best-in-class screening, negative screening, impact investing and sustainability-themed investing.
Like previous editions, US SIF’s research focused on two main topics:
- Investors that use ESG criteria to build portfolios.
- Investors that file shareholder resolutions.
Together, the strategies accounted for about $10.6 trillion of assets at the start of the year. After adjusting for double-counting, the overall figure dropped to a net $8.4 trillion, which amounts to about 13% of total US assets under professional management, US SIF reported.
Despite industry backlash in the US, ESG criteria and shareholder engagement are increasingly being used to address issues ranging from climate change to human rights and fair workplace practices, Woll said. Investors have cited carbon emissions as the top issue from an ESG perspective.
“With new issues such as biodiversity being added to the ‘Trends Report survey,’ we are confident that there will be continued growth in the ESG issues that investors will consider in the future,” she said.
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