Where theory and practice meet: Sustaining and impactful, and especially for governance fiduciaries.
Author: Christopher K. Merker, Ph.D., CFA
Christopher K. Merker, PhD, CFA, is a director with Private Asset Management at Robert W. Baird & Co. He holds a PhD in investment governance and fiduciary effectiveness from Marquette University, where he has taught the course “Sustainable Finance” since 2009. Executive director of Fund Governance Analytics (FGA), an ESG research partnership with Marquette University, he is a member of the CFA Institute ESG Working Group, an international committee currently exploring ESG standards, publishes the blog, Sustainable Finance, which covers current topics around governance and sustainability in investing, and is co-author of the book, The Trustee Governance Guide: The Five Imperatives of 21st Century Investing.
Globally, sustainable investing assets in the five major markets stood at $30.7 trillion at the start of 2018, a 34percent increase in two years. In all the regions except Europe, sustainable investing’s market share has also grown. Responsible investment now commands a sizable share of professionally managed assets in each region, ranging from 18 percent in Japan to 63 percent in Australia and New Zealand. Clearly, sustainable investing constitutes amajor force across global financial markets.
From 2016 to 2018, the fastest growing region has been Japan, followed by Australia/New Zealand and Canada. These were also the three fastest growing regions in the previous two-year period. The largest three regions— based on the value of their sustainable investing assets—were Europe, the United States and Japan.
In a few short decades, sustainable investing has grown from a niche corner of the financial world to a phenomenon large enough that the primary challenge for investors may come in understanding its true scope, the changes it represents for businesses and financial markets, and how to position their personal finances for the future.
By early 2018, funds guided by environmental, social and governance (ESG) issues totaled $98 billion in the United States, a 58% increase over the previous year, according to a 2018 Morningstar report.
The Treasury Department has released a new round of proposed regulations governing opportunity zone funds that answers several key questions that have kept potential investors and fund operators on the sidelines.
The zones in which the funds invest are either in or adjacent to depressed communities, and there are over 8,700 spread throughout the U.S. To date, most of the early opportunity zone funds are focused on real estate developments, but the tax benefit is also available for other types of businesses opportunity in the zone.
Maine’s public pension fund earned double-digit returns in six of the past nine years. Yet the Maine Public Employees Retirement System is still $2.9 billion short of what it needs to afford all future benefits to all retirees.
There is a simple reason why pensions are in such rough shape: The amount owed to retirees is accelerating faster than assets on hand to pay those future obligations. Liabilities of major U.S. public pensions are up 64% since 2007 while assets are up 30%, according to the most recent data from Boston College’s Center for Retirement Research.
See how you compare to the national and state averages.
The Bad
-49% of Americans don’t know what an index fund is
-44% can’t cover $400 out-of-pocket expense
-52% have no retirement savings
-Median household retirement acct bal is $2,500
-66% thought market was flat or down over past 10yrs
The Better
Those with greater financial literacy are more likely to save and plan for retirement, according to TIAA and the Global Financial Literacy Excellence Center at the George Washington University School of Business.
88% of those who answered between 76% and 100% of the questions on the Personal Finance Index (P-Fin Index) correctly save for retirement on a regular basis. By comparison, only 37% of those who answered less than 26% of the questions correctly regularly save for retirement.
86% of those in the first group have additional savings outside of their retirement plan, compared to 34% of the second group, and 63% of the first group usually track their spending, compared to 54% of the second group.
Furthermore, those with greater financial literacy are less likely to be financially fragile; 85% of the first group could come up with $2,000 if an unexpected need arose in the next month, compared to 25% of the second group.
Borrowing and debt management are the areas where knowledge is the highest, but comprehending risk is where it is the lowest.
“The P-Fin Index is the preeminent annual barometer of Americans’ personal finance knowledge,” says Stephanie Bell-Rose, head of the TIAA Institute. “Understanding the connection between financial literacy and financial wellness was a particular focus this year, to help us create a better roadmap for improving the financial well-being of Americans.”
On average, U.S. adults answered only 51% of the P-Fin Index questions correctly. The survey asked a total of 28 questions on the following topics: earnings, consuming, saving, investing, borrowing and managing debt, insuring, risk and where to find financial advice.
What trends are influencing endowment investing in today’s market?
Among larger institutions, college endowments have been at the forefront of SRI and ESG investing…more than one in four colleges engages in some form of SRI. This could take the form of traditional negative screens or restrictions among faith-based organizations, ESG, shareholder activism, or impact investing. Parsing the data by assets, we find nearly 60% of these institutions apply some form of ESG criteria.
Global socially responsible investments grew by 34 percent to $30.7 trillion over the past two years, lifted by Japanese pension funds, retail investors everywhere and broad, growing concern about climate change.
Money managers around the globe said clients were increasingly asking for sustainable strategies and that climate change became a leading issue for investors this year. Retail investors bought up more ethical funds, according to the report, and now account for about 25 percent of assets, up from 20 percent in 2016.
According to Morningstar research, sustainable investment funds, which the research firms defines as those that use environmental, social and corporate governances (ESG) criteria as measurements for scoring the societal impact of investing in a public company, saw record flows of $5.5 billion in 2018.
Last year marked the third consecutive year of record flows to ESG-premised mutual funds, which increased 50% to 351 offerings in 2018.
DWS Group Inc., the asset-management business of Deutsche Bank AG , recently raised $843 million in a single day for a new fund that tries to invest in the best corporate citizens in the U.S.
It was one of the most successful exchange-traded-fund debuts of all time, and especially noteworthy in the slow-growing corner of the market devoted to responsible investing.
For years, asset managers have been trumpeting a new dawn for strategies that deliver competitive returns along with a clear conscience. In the past year alone, firms including Vanguard Group, Goldman Sachs Group Inc. and BlackRock Inc.’s iShares have introduced more than a dozen ETFs that use environmental, social and governance scores to pick stocks and bonds.
But investors have been slow to buy into so-called ESG funds. The triumphant inaugural run of DWS Group’s Xtrackers MSCI USA ESG Leaders Equity ETF may signal a step change in investor participation.
CFA Institute consistently monitors key debates and evolving issues concerning the role and application of environmental, social, and governance (ESG) information in the investment management process. More thorough consideration of ESG fac- tors by financial professionals can improve the fundamental analysis they undertake and ultimately the investment choices they make.
CFA Institute is specifically focused on the quality and comparability of the ESG information provided by corporate issuers and how to integrate various ESG factors into the investment selection process.
The positions below reflect the organizational views of CFA Institute and are intended to guide understanding of ESG.