What's Driving Growth in Sustainable Investing?

Jon Hale: Hi, I'm Jon Hale, director of sustainable investing research at Morningstar, and with me today is Lisa Woll, CEO of US SIF, the Forum for Sustainable and Responsible Investing, who is having their annual conference in Chicago this week.

Lisa, welcome.

Lisa Woll: Thanks, Jon. It's great to be here, great to be at Morningstar, and great to be in Chicago.

Hale: Well, good to have you here. Tell us a little bit about the conference. What's the main theme of the conference?

Woll: Well, the theme, which we chose probably about 10 months ago, is, a New Climate for Investing in Impact. And the idea of it was to talk about climate change as a primary issue, although not the only issue, as well as we knew we'd have a new administration. I don't think we knew 10 months ago how apt the title would be in terms of the sort of tsunami of change that we anticipate may be coming, both on climate and on many other issues that we care about.

Hale: So, what would you say is the main impact so far of the new administration on the sustainable investing climate, I guess, you could call it?

Woll: So, I always think about that in two buckets, because when we put out our trends report last November, right after the election, and the first question I got from journalists is, what is the impact of this election? And the truth is, given the growth in sustainable or ESG assets over the last several years, I think no matter who is elected, we would have continued to see that growth. There's just tremendous interest.

So, I don't think that this administration will have a deleterious effect on it. In fact, I think it might have a positive effect on ESG investing because this administration will close off in many ways the federal government as a place to go for environmental and social advances. And so, what you're left with really is the private sector and states. And so, in a way it may drive more investment into the space which we're hearing, sort of from different asset managers, because people are concerned about ways they can affect issues that they care about.

And on a policy front, we're sort of dealing with every day as a new issue we have to address. And so, we've really moved into sort of more a defensive mode in terms of keeping things going that we care about: climate initiatives moving forward, Dodd-Frank not being pulled back, those sorts of issues. Making sure the SEC continues to function for investors and the shareholder process continues. So, there's multiple impacts, but the ESG growth we're not concerned about; the policy piece we're more concerned about.

Hale: Yeah. I mean, it's interesting because it seems like the catalysts in many ways for the heightened levels of interest in sustainable investing, say, over the last 10 years or so, have been the financial crisis and the climate change.

Woll: Correct. Right. Financial crisis, climate change, another issue that people really use in the shareholder process is political contributions as a result of Citizens United. So, I think that the interest in climate, the fact that we've already pulled back from the Clean Power Plan that an announcement on pulling back or out of Paris is imminent, we're told, is really going to push more investors into looking at clean energy and alternatives in the investment process, because there will not be a national framework on climate in the next four years.

Hale: Yeah. So, we've heard a lot about of the phrase or the term impact in the context of sustainable investing. What is meant by that?

Woll: Well, I think, what's happening is the field for the last 25 years has been focused on impact. So, whether you're working in the public equity markets and screening in companies, who are the better actors or screening out bad actors, or bringing a shareholder resolution, you're making impact. What's happened in the last few years is that you've had more emphasis on other asset classes, so, fixed income, private equity, which we think is fantastic because we think sustainable or impact investing should be able to be done across a whole portfolio. And impact really does mean how do you invest to make social and environmental change. And the word impact has been taken up in the last couple of years, which we use as well, and we take it to mean really the same thing as sustainable or responsible investing.

Hale: But it's very resonant, I think.

Woll: It's very resonant. And so, if the word works, we're happy to have it.

Hale: Yeah. So, a lot of the assets in this field over the years have been obviously in the institutional space, but more and more, I think, individual investors, clearly, we know are interested, particularly younger investors and women in sustainable investing, sustainable impact investing. For advisors out there, what are some of the challenges to sort of incorporating the idea of sustainability into their practices?

Woll: Well, I think, the biggest challenge is that they don't have expertise in this space. So, as you know, today we're offering a course at Morningstar on the fundamentals of sustainable and responsible investment for advisors and other client-facing professionals so that they can learn the basics of the field. That is the number one challenge. It's why we started the course because advisors were not getting education on this. And so, if they are asked by a client, either the client would go somewhere else to find an advisor who knew about it, or would just not do it, because the advisor would say, I just don't know enough about it. And so, that's a very big challenge.

We have a lot of information on our website, for example, on the basics of sustainable and responsible investing. We have guidebooks on how to invest in climate, for example, for retail investors that looks at different asset classes you can invest in to address climate. So, getting more information, reading more of the voluminous materials that are out there I think is incredibly important for advisors.

I think it's also important to have more retail products. So, one of the breakouts we're doing this year at the conference, for example, is on what are the new options for retail investors. One of the interesting things is that there are several robo-advisors that have started in the last couple of years that are focused on sustainable investment options. I think they are going to get a lot of interest because it gives the retail advisor the ability to do this on their own.

Hale: Yeah. And I think retail advisors do have a challenge for putting together portfolios and having access to some managed accounts. Ready-made portfolios would be something that advisors as well as just individual investors using robo would benefit from.

So, Lisa, you've been CEO of US SIF for about 10 years now, little over 10 years. How has the field changed? What kind of challenges out there do you see today?

Woll: Well, I always say that even though I've had the same job for 10 years I feel like I've had three different jobs, because when I started you didn't have groups representing foundations working on mission investing, you didn't have the term impact investing, it was still being called socially responsible investing. So, the wording has changed and developed and sort of broadened.

The product availability has broadened. So, it really is now much more of a portfolio, across portfolio conversation. I think there are more and different products available that interest a broader group of investors and there are a broader group of investors that are engaged. So, what we've seen in the last several years is family offices, high-net-worth individuals, foundations and increasingly pension funds that are being engaged in this investment process. So, we've seen a growth in terminology, a growth in product, and a growth in the type of investors that are entering this space, which are all great developments.

Hale: Great. Lisa, thanks for being with us today. Have a great conference.

Woll: Sure. Thank you for having me. Thank you.

Jon Hale has been researching the fund industry since 1995. He is Morningstar’s director of ESG research for the Americas and a member of Morningstar's investment research department. While Morningstar typically agrees with the views Jon expresses on ESG matters, they represent his own views.