Defined Benefit, Endowments/Foundations, ESG/SRI, High Net Worth, Institutional Investors, Pension Funds, Public Funds

U.S. SIF Releases ESG Guide in Effort to Reduce Greenwashing and Increase Institutional Implementation

U.S. SIF: The Forum for Sustainable and Responsible Investment has released the third installment of its three-part report on sustainable investing titled: Moving Forward with Sustainable Investing: A Roadmap for Asset Owners. The report outlines the basics of sustainable investing and provides guidelines to help highlight best practices that investors can be proactive about implementing at their institutions.

It also includes 10 steps asset owners can take to incorporate investing strategies that take environmental, social and corporate governance (ESG) indicators into account. “There are a lot of steps in the process, but we wanted to provide models and examples for any type of institution,” said Meg Voorhes, head of research at U.S. SIF.

Meg Voorhes, head of research at U.S. SIF.

“Institutional investors are hearing about it [ESG], and they want to know how to take first steps to make it possible. So, we started last year, issuing these road map guides, one for financial advisers, a second one for money managers, and this is our third and final guide for institutional asset owners,” said Voorhes.

The guide is also intended to help investment officers or board members who may need some assistance in arguing the case for ESG implementation at their institution. “If you are the trustee of an institution, and your chief investment officer came to you with a strong-man argument saying, ‘we are trying to make money for you, we are not thinking about saving world,’ then we hope this guide will give this individual on the board or whomever the outfit is in the institution, some actual ammunition and resources and links,” Voorhes explained. “There are so many studies now about how ESG analysis can help financial performance, it can be a tool that investment managers can use,” she added.

If you are the trustee of an institution, and your chief investment officer came to you with a strong-man argument saying, ‘we are trying to make money for you, we are not thinking about saving world,’ then we hope this guide will give this individual on the board or whomever the outfit is in the institution, some actual ammunition and resources and links.

Greenwashing on the rise

The report is also intended to help limit the amount of “green washing” that has been occurring in the industry. Vorhees noted that a hazy area has developed around what implementing an ESG strategy requires. “I feel suspicious when I see an institutions say, ‘Oh, we are doing ESG investing, and we look at ESG issues,’ but then we don’t see a lot more detail, like what types of issues? When people can be more specific that can be more helpful,” she said.

A similar issue occurs around the implementation of impact investing at some endowments and foundations. “Sometimes, we see foundations talking with great enthusiasm about impact investing, but it applies to a very small part of the endowment; they may not be looking at the rest of the endowment and how it’s invested. So, the idea with this report is to gently encourage some institutions and to nudge others, and maybe really challenge other institutional investors,” Vorhees said.

Ultimately, “we want to encourage the institutions that have not started and nudge those that have taken a first step or two, and challenge those that have already taken a step or two, but who could do more, now that they are comfortable with the process,” she said.

Everyone is doing it

According to the U.S. SIF guide: “The case for sustainable investing has become a mainstream investment practice. Numerous money managers now have decades of experience with it. An expanding library of studies has demonstrated that sustainable investing products offer similar or better financial performance compared with their conventional counterparts, and current notions of fiduciary duty underscore the importance of considering ESG factors…A growing body of evidence indicates that ESG investments achieve comparable or even better financial returns than conventional investments.”

The guide cites many examples of such evidence. For instance, in 2017, Nuveen TIAA Investments released a study: Responsible Investing: Delivering Competitive Performance. “After assessing the leading sustainable investing equity indexes over the long term, the firm “found no statistical difference in returns compared to broad market benchmarks, suggesting the absence of any systematic performance penalty. Moreover, incorporating environmental, social and governance criteria in security selection did not entail additional risk,” the report said.

Germination of the guide – improving awareness

The U.S. SIF reports had their germination a couple of years ago when the organization implemented a goal of improving awareness about sustainable investing and raising standards. “There was concern among board members and a number of  institutional investors and asset managers who were saying that they were doing sustainable investing or ESG investing  or green investing or impact investing, and it was not always clear that they were taking a particularly in-depth or comprehensive approach,” she said. “There were concerns about green washing,” she noted.  “So we thought: Where can U.S. SIF play a role?”

Toward that end, the Roadmap provides sample investment policy statements, proxy voting guidelines, resources on investor engagement and impact measurement and case studies of three institutional asset owners: the Wallace Global Fund, a philanthropic foundation, the single-family office Blue Haven Initiative, and the $227.8 billion in assets under management California State Teachers’ Retirement System (CalSTRS).


Kirsty Jenkinson, director of sustainable investment and stewardship strategies at the pension fund

The Wallace Global Fund case study looks at the foundation’s multi-year transition to a comprehensive “mission-investing” portfolio. The Blue Haven Initiative case study highlights specific ESG considerations the family office uses to evaluate its investments in each asset class, and the CalSTRS case study features the investment policy and management plan that is the basis for CalSTRS’s comprehensive ESG investment approach.  

“CalSTRS has long recognized that ESG issues have the potential to affect the performance of its investment portfolio across companies, sectors, regions and asset classes,” said Kirsty Jenkinson, director of sustainable investment and stewardship strategies at the pension fund. “We continue to advocate for companies to disclose information on both the financial and nonfinancial aspects of company operations as this disclosure is needed to comprehensively assess risk and properly value investments. We are not looking for just more disclosure—but the right disclosure—disclosure on environmental, social and governance issues that present significant material risks to corporate value. Each asset class uses numerous methods to identify and evaluate these risks throughout the investment management process.”

Differing structures and cultures

Despite positive responses from allocators, Voorhes admitted that “the report was a little difficult to write” because institutional asset owners are so varied in their approach to investing. “They have varied governing structures and cultures, and we recognize that, so we tried to make it very clear by numbering the steps that institutions can take,” she said. “We are not saying that it’s necessary to follow every step in numerical order, but we did try to provide some guidance.”

Climate change was the one area that investors who engaged with U.S. SIF brought up time and time again.  “Among money managers, climate change is the leading ESG concern and was considered across $3.00 trillion in assets under management in 2018, an increase of 110 percent since 2016,” according to the report. This is a reflection both of increased investor concern about climate risk and of managers focusing strategies on low-carbon alternatives and climate solutions,” it said.

10 Steps for Institutional Asset Owners to Develop and Enhance Their Sustainable Investment Policies and Practices.

1. Establish the oversight process

 2. Create or update the investment policy statement

3. Identify sources of ESG data, research and training

4. Develop an ESG incorporation strategy

5. Identify asset allocation and investment options

 6. Select managers for externally managed assets

7. Develop proxy voting guidelines and vote proxies

8. Develop and implement an investor engagement strategy

 9. Measure and manage impact

 10. Participate in building the field

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