Presidential agenda poses short-term challenges, but experts say the ESG tenets are here to stay
The Trump administration’s move last month to revive two pipeline projects, including Keystone XL, is one example of how presidential policy could conflict with so-called ESG investing in the short term. Here, the Keystone Steele City pumping station, into which the planned Keystone XL pipeline is to connect.
Feb. 6, 2017 1:13 p.m. ET
The Trump era could hinder the performance of some mutual funds that focus on sustainable investing in the short term, but it won’t put the brakes on the booming trend of investing based on environmental, governance and social factors.
Responsible or sustainable investing, or investing in companies that address ESG factors, has grown at a rapid clip. Assets under management in U.S.-based socially responsible investing strategies grew to $8.7 trillion at the start of 2016, up 33% from 2014, according to US SIF: The Forum for Sustainable and Responsible Investment, a Washington, D.C., a trade group whose members include mutual-fund companies, foundations, pension funds and others interested in sustainable investing.
While investors pulled more than $127 billion out of U.S. open-fund mutual funds last year overall, they put nearly $3 billion into funds with some type of sustainable, responsible or impact mandate, according to estimates from investment-research firm Morningstar Inc.
“The responsible-investment movement in not a movement started by Wall Street and it’s not a social movement,” says John Streur, president and chief executive of Calvert Research and Management, a subsidiary of Eaton Vance Corp. that manages more than $10 billion in ESG investments. “It’s a movement from large asset owners and large operating companies who have essentially said, ‘We need to do a better job with resource efficiency, environmental impact and social justice, and all those things matter to the financial results of companies.’ ”
But many of President Donald Trump’s stated policies are anathema to such investors.
The president raised environmentalists’ ire in late January by taking steps to revive two oil pipeline projects—the Keystone XL and Dakota Access pipelines—that the Obama administration had rejected. He has called climate change a hoax, said that he would withdraw the U.S. from the global climate agreement signed in Paris in 2015 and tapped Oklahoma Attorney General Scott Pruitt, who said he’ll focus on repealing regulation that would cut carbon emissions, to lead the Environmental Protection Agency.
In addition, hoped-for corporate disclosures on ESG issues are unlikely to materialize under the new administration. In April, the Securities and Exchange Commission solicited comments on modernizing some business and financial-disclosure requirements, including potential disclosure of information related to public policy and sustainability matters. Many see that modernatizion as unlikely under the Trump administration.
The SEC declined to comment.
Under the new administration, sustainable investors may have a hard time keeping up with the profitability of those fund managers who invest in “whatever makes the most money” regardless of their impact on ESG issues, says James Henry, a senior fellow at Columbia University Center for Sustainable Investment. Such investors will pay a price “for having a clean conscience,” Mr. Henry says. “On the whole, I think they’re going to have to swallow hard for the time being and watch less-discriminating portfolio managers clean up.”
Mr. Trump’s win already appears to be taking a toll on some clean-energy exchange-traded funds. This year through Feb. 3, investors pulled $5.4 million from the $72.6 million First Trust Global Wind Energy ETF (FAN) and $2.1 million from the $86.2 million PowerShares WilderHill Clean Energy Portfolio (PBW), according to FactSet Research.
First Trust Advisors didn’t return a call seeking comment. Invesco PowerShares said it didn’t comment on short-term flows to its funds.
But Mr. Trump’s agenda is unlikely to derail the overall ESG investing trend, industry analysts and managers of ESG funds say. A growing body of research suggests that companies that handle ESG issues well tend to be high-quality companies that are good long-term investments, says Jon Hale, head of sustainability research at Morningstar.
Many institutional investors, including pension funds, take a long-term perspective on the markets, the economy and the companies they invest in, Mr. Hale says. These investors now consider issues such as how companies are dealing with climate change and their overall environmental impact, along with gender and other diversity issues, and managing their supply chain to ensure human rights and fair labor standards, he says.
There’s also evidence that more individual investors are interested in ESG investments, Mr. Hale says. Surveys of emerging investors—those who will control more capital going forward—show that there tends to be a high level of interest in sustainable investing among younger generations and women in general, he says.
And more corporations are embracing clean energy and other ESG concerns in recognition of inexorable changes.
Coal, for example, “is not coming back,” says Jens Peers, chief investment officer of sustainable equities and fixed income at Mirova, Natixis Asset Management’s responsible investment division, which managed $7 billion in responsible investments globally as of Sept. 30.
Coal mines have underperformed over the last few years not because of climate-change regulations, but due to cheap natural gas, he says. Many utilities have switched from coal-fired power plants to gas-fired plants; they’re not switching back, and that trend will continue, he says.
“With companies already looking at more-sustainable energy choices, they’re unlikely to not pursue those,” says Lisa Woll, chief executive at US SIF: The Forum for Sustainable and Responsible Investment. “I think there will be continued growth across a range of asset classes using sustainable investments.”
Bank of America Merrill Lynch estimates that $20 trillion will flow into U.S.-based ESG funds over the next few decades. That’s roughly the size of the S&P 500 today.
There may be risk for a couple of quarters where the ESG segment struggles to see how Trump policy plays out, says Savita Subramanian, head of U.S. equity strategy at BofA Merrill Lynch. But investing with ESG factors, such as board diversity, emission standards and employee satisfaction, seems to contribute to outperformance over the long term in many different political environments, she says.