Policy Corner | December 14, 2022

The case of the suddenly missing trillions in ESG investments

Amy Cortese
ImpactAlpha Editor

Amy Cortese

ImpactAlpha, Dec. 14 – It’s an ESG whodunnit. 

Sustainable investment assets in the U.S. totaled $17.1 trillion in 2020, according to US SIF. This year? Just $8.4 trillion. Where did $8.7 trillion – more than half of sustainable investments – go? 

To the greenwashing graveyard. 

Environmental, social and governance, or ESG, advocates and regulators alike are clamping down on greenwashing. Many once “sustainable” funds do not stand up to the scrutiny. 

For the latest edition of the biennial Sustainable Investing Trends report, US SIF tightened its methodology to include only funds and vehicles that identify ESG as integral to their investment decision-making or that point to specific ESG criteria used. Labeling a fund “ESG” or “sustainable” is no longer enough. 

The change coincides with a crackdown by regulators on greenwashing. The Securities and Exchange Commission is readying rules to require funds and advisors to back up their ESG claims – causing some firms to drop the labels and to be more selective about which funds they market as integrating ESG considerations.

“We’re the canary in the coal mine, in a way, on the impact of this ESG disclosure proposal by the SEC,” said US SIF’s Lisa Woll. 

A similar scenario has played out in Europe. Some $2 trillion of sustainable investments vanished after the European Union passed the Sustainable Finance Disclosure Regulation requiring more rigorous labeling and disclosure by funds. As we pointed out at the time, that may actually reflect progress, not problems.

Raising the bar

US SIF counted up $8.4 trillion in assets that integrate ESG into decision-making or file shareholder resolutions on ESG issues. That’s just 13% of the more than $66 trillion in US assets under management.

The survey identified climate change as the top issue for institutional owners and managers. One growth area amid the declines: community investing, including assets under management by community development financial institutions, surged by 72% since 2020 to $458 billion.  

US SIF’s more generous 2020 numbers suggested that one-third of total U.S. assets under management could be called sustainable. In that survey, specific ESG investment vehicles and issues were only identified for about 30% of the assets. The lack of details prompted US SIF to change its methodology. 

“It’s very important to raise the bar with this report,” said US SIF’s Diederik Timmer. “US SIF’s strategic goals include a focus on advancing best practices in the field, and we believe the shift in the Trends report methodology contributes to this goal.”