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JPMorgan Chase & Co. analysts expect 2021 to be the first year that more green, social, and sustainability debt is sold in U.S. dollars than euros. Additionally, the U.S. SIF Foundation said last month that sustainable investments account for about $1 in every $3 of total assets under professional management.
Though behind the EU agenda on ESG regulatory the U.S. has made incremental strides in the ESG regulatory landscape. However, amidst the transition to the Biden administration, regulatory bodies in the United States are finally moving the needle on ESG.
First, let’s uncover the EU progress to date. Since 2017, the European Union has required listed companies to include a “non-financial statement” on corporate social responsibility matters. At a minimum, it addressed environmental, social and employee matters, respect towards human rights, anti-corruption, bribery, diversity data, and more. In 2019, they went a step further by issuing guidance on disclosure of climate-related information. In addition to climate change matters, the European Union has also introduced new disclosure requirements on conflict minerals in supply chains.
This March, the EU launched its SFDR regulation to address “greenwashing” and fulfill its carbon neutrality ambitions. With many more ESG-related reforms in the pipeline, the conversation in the EU has clearly moved from the “why” to “how” of ESG investing.
In comparison, the US is still a laggard in this area. As the Biden administration takes over from the Trump administration, the focus is on reversing previous ESG-related rollbacks and putting ESG back on the agenda. For starters, the administration recently reviewed the DOL’s controversial ESG Rule and halted its enforcement. In his “Executive Order on Tackling the Climate Crisis at Home and Abroad,” President Biden prioritized managing climate-related risks and exploring climate finance plan opportunities. This April, at Biden’s Climate Summit, the U.S. announced aggressive emission reduction and carbon neutrality targets, aiming to reduce greenhouse gas emissions by 50-52% below 2005 levels by 2030.
So what’s next? Our latest whitepaper, The US’s ESG Regulatory Environment: Past, Present, and Future, uncovers the key trends that will shape the future of ESG regulation in the U.S. While the U.S. lacks the ESG infrastructure that Europe has developed, we believe it’s just a matter of time before the sustainable investing movement gains strong momentum in the U.S.
You may not know this, but you can be an ESG investor even if the only form of investing that you’re active in is retirement savings. If you have a 401k or a 403b, you can roll over your funds into ESG portfolios, which is a great way to demonstrate your values through your investments.
ESG investing is tethered to the philosophy of ‘sustainable investing.’ It involves researching and factoring in environmental, social, and governance issues, in addition to the usual financials, when evaluating potential stocks. By investing your funds into ESG portfolios, you increase corporate accountability. How? As a socially-conscious individual, you can leverage your shareholder position to have a voice and influence corporations to act in the best interest of the environment, society and governance through proxy voting.
Aside from the ability to create change, you’ll also enjoy strong returns. A study from the Financial Times found that approximately six out of ten sustainable funds delivered higher returns than their conventional equivalents over the past decade. Furthermore, according to Morningstar, ESG-focused “sustainable funds" saw net inflows of more than $10 billion in capital during the second quarter of 2020. This brings the year-to-date inflow into ESG investing funds to $20.9 billion. The full-year record in 2019 was $21.4 billion so ESG-focused funds are projected to beat the record by year-end, which shows the future promise of socially conscious investing.
Given the rise of ESG investing, it is smart to incorporate sustainable funds in your 401(k) plans. In fact, many companies recognize that including sustainable portfolio options may be attractive to employees. If your company plan doesn’t include ESG options, you can look up the ESG ratings for the funds they do offer (Some funds have high ESG ratings even if they aren’t advertised as such). Morningstar has a widely trusted sustainability rating system that you can access with a free trial. If you have a 401k or 403b Rollover due to a change in employment and are looking to invest it for impact, please reach out, we'd love to assist you.
We all have a responsibility to care for the planet, the communities we live and work in. It’s incumbent on all of us to be responsible citizens of our society and reflect that shared sense of responsibility through our investment choices. ESG investing is lucrative - not only creating growth, but also fueling good - creating a more sustainable, conscious world.