As we approach the third decade of the new millennium, rapid changes are engulfing the investment world. In the last 36 months we have seen assets under management with ESG managers(1) increase to nearly $23 trillion globally, a near doubling in the U.S. alone to over $9 trillion. At the same time we have seen a huge shift of assets from actively managed investments into so-called passive, indexed vehicles with nearly half of all equity funds investments in the U.S. now held in passive strategies.(2)
Turning to public funds, we are likewise seeing dramatic shifts, and generally, not positive ones. The five largest U.S. municipal bankruptcies on record have all occurred nearly every year since 2011. The most recent being Puerto Rico this year, which exceeded the prior record set by Detroit by nearly four-fold. All but one were directly related to pension problems.(3) The implications for municipal bond investors are obvious, as Illinois recently flirted with becoming the first U.S. state to be downgraded to below investment grade by a bond rating agency.
Investors find themselves at a cross roads. Sustainability itself is taking on a dual meaning in this brave new world: can finance sustain itself into the future, and what impact can it have on society at large?
These are big questions with no simple answers. And they affect us all as investors, employers and employees; taxpayers and retirees; and investment managers and fiduciaries; from the largest sovereign wealth funds to the most modest of non-profit foundations.
With this as background, I welcome you to www.SustainableFinanceBlog.org. My desire is to bring thinkers, commentators, policy makers, researchers and practitioners across the spectrum to engage in a dialogue on these issues.
We will showcase some of our ongoing research such as around the burgeoning topic of governance in investment management, as well as the work of others. With rapid changes in the area of asset management, and a range of opportunities and challenges facing asset owners and investors, we’d like this to be a resource for thoughtful discussion around these topics.
I invite you to add to this discourse – challenge our ideas or introduce new ones – as we approach this.
Christopher K. Merker, Ph.D., CFA
Fund Governance Analytics, LLC
(1) ESG stands for Environmental, Social and Governance factors in investing.
(3) There have been several high profile municipal bankruptcies over the last five years. All of these bankruptcies noted here with the exception of Birmingham were related to pension problems. Detroit was the largest municipal bankruptcy in U.S. history. The city filed on July 18, 2013, and at the time had $18 billion in outstanding general obligation bonds. The Washington Examiner (July 20, 2013 issue) cited public employee pensions as three of the top 10 reasons for the bankruptcy. For more information on these and other municipal bankruptcies see Winegarden’s, “Going Broke One City at a Time: Municipal Bankruptcies in America”, Pacific Research Institute, January 2014.
Christopher K. Merker, PhD, CFA, is a director with Robert W. Baird & Co. Merker holds a PhD in Investment Governance and Fiduciary Effectiveness from Marquette University. He is a past president of the CFA Society Milwaukee and a current board member. An adjunct professor of finance at Marquette University, where he teaches the investment course, Sustainable Finance, he is also executive director of Fund Governance Analytics, LLC, a provider of governance research and diagnostic tools for issuers, asset owners and institutional investors. He publishes the blog, Sustainable Finance, which covers current topics around sustainability in investing (www.sustainablefinanceblog.org)