Lee O’Dwyer, CFA
Equity Market Specialist, Bloomberg L.P.
There has been much reference in the Environmental, Social, and Governance community to the growth in assets under management that are targeting sustainable responsible investing. There is also great discussion around double counting and the true value of those assets, along with a debate on the very definition of “targeting”—Is it social currency or real intention on the part of the institution?
I opened a presentation at RI Asia 2015 with an illuminating chart (Figure 1). The point I was illustrating to the mostly APAC audience, was the shift toward integration strategies in the United States. The chart resonated with me since I witness this shift daily when talking to clients, but the growth trajectory was most interesting because it is directly supported by our client’s growing appetite for data.
Figure 1: Sustainable and Responsible Investing in the United States
Source: U.S. SIF Foundation. Report on U.S. Sustainable, Responsible, and Impact investing Trends. Fig. A, p. 12. http://www.ussif.org/Files/Publications/SIF_Trends_14.F.ES.pdf.
The study by the Forum for Sustainable and Responsible Investment (U.S. SIF) Foundation (of which Bloomberg is a sponsor) notes that over the course of two years the AUM targeting SRI has grown 76% to $6.57 trillion. Assigning those assets to strategies shows that the vast majority of the growth has come from the evolution of SRI integration, or “assets that are managed with ESG factors explicitly incorporated into investment analysis and decision-making.”
The left-hand side of the chart illustrates the long-standing tradition in the United States of filing resolutions at companies’ annual general meetings to address environmental, social and governance concerns. We then had the Market’s “Lost Decade.” Total allocated SRI assets didn’t suffer a retracement during this period, but there was a movement away from resolutions, as shareholders increasingly sought to integrate ESG opportunities and risks into the investment decision-making process. As U.S. markets rebounded, allocated assets grew substantially, and with that, a focus on using all the tools at their disposal to engage with companies on ESG issues: Carbon foot-printing of portfolios, screening, benchmarking, ESG activism around divestment strategies, and a large emphasis on identifying the key performance indicators for sectors.
Note the similarity between the 76% growth of SRI assets and the growth in Bloomberg client demand (Figure 2). Bloomberg collects Environmental, Social, and Governance data from the published materials of over 11,000 companies globally. The data is fully integrated into the terminal, and the number of clients using the data is growing dramatically.
Figure 2: ESG Customers and Funds
Source: Bloomberg Impact Report 2014. http://www.bloomberg.com/bcause/content/uploads/sites/6/2015/06/15_0608-Impact-Report_Web.pdf.
While the targeting of these themes by assets is on the rise, the amount of environmental data reported by corporations varies widely. Consider U.S. companies, for example: Bloomberg Data shows that only 27% of the Russell 3000 discloses environmental data of any kind. Moreover, less than 10% disclose more data than their U.S. industry peer average; in other words, the level of disclosure is heavily skewed towards poor disclosure or none at all. This might be easily explained by the fact that only 329 of the companies in the index currently discuss risks of climate change in the management discussion and analysis section of their latest annual reports, and an even fewer number, 114 companies, link executive compensation to ESG.
The figure of $6.57 trillion should confirm that SRI themes have escaped the fringe label—in fact, an endless stream of conferences and pronouncements from central bank heads, business leaders, and heads of state has made the theme mainstream. As recently as two years ago, I was introducing the data to clients—now they proactively seek it out. Clearly, the efforts of the last half of this decade need to refocus on disclosure because developing effective investment strategies based on anemic disclosure will be almost as challenging as the climate problem itself.
Lee O’Dwyer, CFA Bloomberg Equity Market Specialist. Drawing from twenty years of experience in traditional and alternative investments, Lee O’Dwyer helps Bloomberg clients gain maximum leverage of their terminal toward actionable strategies.
Discussing ESG data, equity fundamental valuations, earnings & idea generation tools, and portfolio analysis with top analysts and portfolio managers, O’Dwyer’s experience and communication style lets him calibrate around the varied needs and styles of clients, allowing him to interpret their comments and provide meaningful and useful support.
Originally from England, O’Dwyer is a member of the CFA® Institute and has earned the right to use the Chartered Financial Analyst (CFA®) designation.