When the sustainability movement was launched decades ago, the challenge seemed almost insurmountable. Advocates at once sought economic, environmental, technological, and regulatory changes. Further, they argued that proof of financial performance and accountability for results were essential to the global transformation they had in mind.
Yet that is precisely what seems within reach, if not entirely in hand. A large number of financial institutions have integrated some element of ESG into their investment strategies and believe that ESG has helped manage portfolio volatility.
Over time, evidence of ESG-driven performance has steadily grown. Our researchers at RockCreek recently reviewed 2,200 studies and surveys of global institutional investors and found that a large share showed a positive correlation between sustainable investing and financial results.
Perhaps most impressive is the extent to which ESG and impact investing has become part of mainstream thinking. Two thirds of high-net-worth millennials surveyed in the US stated that their investment decisions are a way to express their social, political, or environmental values. One third of high-net-worth baby boomer investors view their investments as vehicles for achieving environmental, social, or political change. Many ESG investors expect them to perform as well or better than long term investments.
In many respects, however, the hardest work is ahead.
ESG investing has been broadly accepted, but less than one in five asset managers allocates more than 50 percent of assets on the basis of ESG factors. Attributes that would allow massive scaling—such as reliable benchmarking, measurements, standardization of terminology, and deep pools of capable talent—are still lacking. One of the biggest challenges continues to be the collection, processing, and analysis of ESG-relevant data. Both ESG standards and purveyors of data have proliferated. Bloomberg, Dow Jones, MSCI, and Thomson Reuters are just a few of the big players in this market, and the field is growing.
Governments have been setting business regulation, ESG disclosure policy, public policy, ESG integration in public pensions, defining fiduciary responsibilities and stewardship initiatives. There is also increased accountability through various frameworks and principles e.g. Six Principles for Responsible Investment (UNPRI). RockCreek is one of the signatories. The signatories more than doubled in the past 6 years to over 2100 representing 81 trillion of assets under management in 2018. RockCreek has also contributed to the formulation of the IFC Operating Principles for Impact Management and is one of the first adopters of the Principles.
It is hardly surprising that institutional investors are looking for help in navigating this new landscape. Some of them have been turning to knowledgeable asset managers such as RockCreek.
For years, RockCreek has operated with ESG as a core principle. Since inception, it has invested some $2.4 billion in ESG and impact companies, and more than $4.3 billion in emerging managers and minority, women and disadvantaged firms.
RockCreek investments range from DreamBox, which gamifies pre-K to 8th grade learning materials in the US, to Omega Energia, which develops, acquires, and manages renewable energy plants in Brazil. In addition, RockCreek has made a major investment in creating one of the largest ESG databases in the industry—one encompassing roughly 2,200 public investments and 1,000 private investments. The goal is to empower institutional investors to obtain critical masses of data where it has been fragmented, allow analysis and benchmarking of data where it has lacked uniformity, and enable investors and asset managers to understand choices, alternatives and options a company faces and to test new theses by examining factors across sectors, regions, and financial instruments. Increasingly the discussions around disclosure will revolve around revealing future scenarios as past performance.
Partnerships and multi-stakeholder dialog including with peers and providers will be crucial in helping more investors to harness the potential of ESG. The more ESG begins to function as a vibrant, decentralized market-where pricing of key factors such as carbon is transparent; where definitions, benchmarks and standards for transactions are clearly articulated and widely accepted; and where there is a wide array of securities and other assets for the creation of economic value and managing of risks- the closer it will come to achieving the goal of a sustainable global economy.