Growth from both retail and institutional investors has been steady in what is now called ESG (environmental, social and governance) issues.

Total assets that are managed according to ESG factors are valued at $3.7 trillion, up from $3.1 trillion in 2010, according to the Forum for Sustainable and Responsible Investment's (US SIF) 2012 report on sustainable and responsible investing trends in the U.S.

The number of investment funds incorporating ESG factors has risen to 720 funds managing over $1 trillion in 2012 from 260 funds managing $202 billion in 2007, according to US SIF's report. Those funds include mutual funds and alternative investment funds.

Most recently, Bank of America has launched a program through Merrill Lynch Wealth Management and U.S. Trust to offer more than 180 ESG-themed investments to individual and institutional investors, including mutual funds, exchange-traded funds, separately managed accounts and alternative investments.

The investments are organized around the themes of environmental stewardship, human capital practices including investments focused on improving the lives of women and girls and faith-based investing, and corporate governance issues focusing on transparency, disclosure, reporting and incentives.

At the same time, more than one thousand institutions have signed the United Nations-supported Principles for Responsible Investment (unpri.org). The initiative represents 761 investment manager signatories, 271 asset owners and 193 professional service partners with $33 trillion in assets under management. Mellon Capital Management was the most recent signatory.

PRI is a set of aspirational principles and suggested actions to enhance investors' approach to ESG issues. "Signing on to the PRI is a way to demonstrate that to the market but it's also a way to network with other investors across segments, geographies and asset classes that are also implementing/enhancing their approach to responsible investing," said Craig Metrick, U.S. head of responsible investment at Mercer.

These developments follow earlier initiatives by firms including T. Rowe Price, which has implemented a policy to divest its holdings in foreign oil companies that "pose high risk due to their ties to the Sudanese government and its connection to human rights abuses," according to the firm's website on corporate responsibility.

Much of the growth in ESG investing is fueled by the realization that some ESG issues that have traditionally been the domain of socially responsible investment (SRI) investors "are material issues and provide investment risks and opportunities so we are seeing clients interested in taking advantage of those," said Metrick.

Among investment products catering to accredited and institutional investors, US SIF reported that $132 billion was invested in alternative investments focused on ESG issues in 2012, a 250% increase over 2010, said Meg Voorhes, deputy director of research and operations.

For private equity and venture capital investors, leading ESG criteria include pollution, sustainable natural resources and environmental solutions, Voorhes said, adding that US SIF tracks 178 such funds with $57 billion in assets.

The leading ESG criteria for mutual fund investors is Sudan, with 282 funds and $525 billion in assets screening for oil-related companies that do business there, Voorhes said.

Meanwhile, 167 funds with $135 billion in assets exclude tobacco-related companies, 141 funds with $132 billion in assets screen out alcohol-related companies and 136 funds with $59 billion in assets omit companies associated with gambling, said Voorhes.

While ESG investing is growing, the growth is not reflected in statistics on new socially responsible investment mutual funds and fund flows tracked by Lipper and Morningstar.

Jeff Tjornehoj, Head of Lipper Americas Research, said that SRI funds had "pretty meaningful outflows" in 2011 and 2012. The SRI investor has traditionally been sticky, standing by decisions through thick and thin, "but we didn't see that in 2011 and 2012," which had combined outflows from equity funds of $1.5 billion, he said.

"SRI investors aren't immune to downdrafts in the market," Tjornehoj said. "The setback in 2008 affected everyone and changed a lot of perspectives on risk."

Morningstar tracks 132 SRI funds, excluding funds with a faith-based focus. One hundred and fifteen of those have been around at least three years and 45 have been around for at least 10 years, said David Kathman, senior fund analyst. "Overall it's been growing but not exponentially as a percentage of fund assets," he noted.

Mercer's responsible investment practice was created in 2004. Among other things, the group provides a tool that assigns an ESG rating to managers at the investment strategy and firm level covering more than 5,000 investment strategies. Ratings are determined after Mercer executives meet with asset managers to determine how and to what level we think they are integrating ESG into their investment process, Metrick stated.

Since the tool was introduced in 2008, asset managers have become more sophisticated about ESG issues, according to Metrick. "They are hearing more about these issues from their clients and so they are paying more attention and are able to have a better conversation with us."

Among the factors driving interest in ESG investing is a fossil fuel divestment campaign (gofossilfree.org) started about a year ago targeting higher education endowments, Metrick said. The campaign has "opened up a lot of conversations" with institutions, he noted. Voorhees agreed adding that while "we may not see institutions divesting from fossil fuel stocks, there is growing interest in investing in climate change solutions."

Another prod to institutions has been the emergence of impact investing, which is gaining steam with endowments and foundations, said Metrick. Such investments enable investors to make a positive impact and include community development funds that invest in affordable housing or small business loans; microfinance to provide loans to underserved communities and people; sustainably managed timber and agricultural land and clean technology investments, he stated.

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