Sustainable Investment Skeptics are Becoming Believers

The doubters of sustainable investing are rapidly dwindling in numbers, according to a study by asset manager Schroders, which found that cynics of the sector have fallen by nearly 50% in just three years.

According to Schroders’ Institutional Investor Study 2019, the proportion of investors worldwide who do not believe in environmental, social, and governance investing has fallen to 11% this year from 20% in 2017. It also said that the decline was most notable in Latin America, where the percentage of skeptics fell to 12% from 29% in 2017.

“This trend is also no longer confined to specific regions globally,” Jessica Ground, Schroders’ global head of stewardship, said in a release. “Investors across all the continents surveyed – including those which are often not associated with a strong sustainable focus – are increasingly convinced by the benefits that sustainable investing can deliver.”

Three-quarters of investors expect sustainable investing to increase in importance during the next five years, up from 67% in 2017. Europeans are bigger believers than investors from other regions as 84% of investors in Europe said they expect sustainable investing to grow in importance during the next five years. This is compared with 67% of investors in the Asia-Pacific who said it will grow in importance – the lowest proportion among the major geographic regions.

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The respondents of the study include pension funds, insurance companies, sovereign wealth funds, endowments and foundations managing approximately $25.4 trillion in assets.

Despite the sharp rise in believers, not everyone is convinced as nearly one-fifth of investors (19%) said they do not invest in sustainable investment funds. The respondents indicated, however, that proof that sustainable investing can increase returns could bring more of those doubters around.

The availability of better data or evidence that can help improve returns would be a key factor boosting sustainable investing, according to 67% of North American investors included in the survey.

Greater transparency and better ESG-related benchmarks were the next most important factors for investors. Sixty-four percent said integrating sustainability across the investment process was the preferred method for implementing sustainable considerations. This figure was 70% for investors in Europe. In the Asia-Pacific region, however, 57% of investors preferred negative screening, slightly ahead of the proportion which preferred full integration.

Among ESG issues, climate change has become the most important area of engagement among investors, surpassing corporate strategies, according to the report. Accounting quality, bribery and corruption, diversity and labor rights also increased in significance among stewardship topics.

“The study emphasizes that this is only going to grow over the next five years with the likes of climate change now viewed by investors globally as the most important issue for stewardship engagement,” said Ground. “We believe that establishing a clear understanding of the climate change investment risks facing our clients is a vital step towards managing those associated risks.”

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Illinois, straining under huge pension funding shortfalls, is turning to a consolidation of 650 suburban and downstate police and fire municipal pension funds. But questions linger about how effective the maneuver will be.

The hope is that the efficiencies of a combo will save $850 million to $2.5 billion over five years. On the surface, that makes a lot of sense: Tiny municipal pension plans lack the expertise and heft to invest cheaply and well.

The plan by Governor J.B. Pritzker is being billed as a good step to revamping the public worker retirement system. Last month, Pritzker called the proposal “momentous achievement in state history.” The plan, which has gradually enlisted the support of police officers and firefighters, now goes before the state legislature, which just returned for the fall session. Plenty of other plans in the state, such as in Chicago and those aiding state workers, have big problems, too. So the small-municipality plan is just a start.

Trouble is, there’s some doubt that the local-pension consolidation will be very effective. Wirepoints, a research organization that covers Illinois government, believes that any savings will be overwhelmed by the weaknesses of the pension systems.

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“The proposal doesn’t reform how Illinois hands out retirement benefits. And it doesn’t change the fact that cities are hamstrung by state control of the pension rules,” wrote Wirepoints analysts Ted Drabowski and John Klingner. “So, while the savings could be meaningful for the public safety funds, it won’t end Illinois’ pension crisis or its worsening trajectory,”

Past attempts at shrinking the shortfalls in the state’s various pension programs have fallen flat. An initiative in the summer to save the state an estimated $423 million this year fell far short of their goal, with only $13.1 million saved. The state offered buyouts to its workers, but few takers emerged.

Moody’s Investors Service warned earlier this year that attempts to tackle the state’s pension debt would be futile without making major cuts. It said that “a failure to adopt mitigating strategies soon will greatly increase the state’s risk that these rising costs will become unaffordable” without “severe” reductions.

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