Investing in Environmental, social and governance (ESG) and other socially responsible funds-conventionally a mission of institutional investors-has grown in the retail space as investors look to align their money with their values.
As a result, managers of ESG funds are revamping their marketing and business models to better appeal to these consumers.
Morningstar research lists that year-end assets for ESG-focused open-end mutual funds and ETFs have grown from a shade over $26 billion in 2008 to about $51.5 billion as of Oct. 31.
"There is really a rapidly growing demand by retail investors for sustainable investment products and strategies, and I am actually part of that movement," Ceres Director of Investment Programs Chris Davis said. "The data shows that there is a lot of money moving into the ESG space, the SRI funds and they're growing more rapidly than mainstream mutual funds."
Davis, who heads investment programs for the nonprofit advocacy organization focused on sustainability, said that conversations with SRI/ESG fund executives currently participating in Ceres' Investor Network on Climate Risk point to "business in many cases is booming."
However, Davis said that a "number of factors" are fueling this transition of monies that was traditionally organized by institutional and mission-based investors.
"I think it's educated people who want to invest in solutions to what they see as increasingly serious social and environmental problems in the world," Davis explained. "I think there is also a growing business case and a growing awareness of that business case that you don't have to sacrifice returns to invest in the space."
In the Forum of Sustainable and Responsible Investment's (SIF) 2012 Trends Report, ESG criteria analysis has been included within U.S. investments of more than $3.31 trillion at year-end 2011. These assets are held by 443 institutional investors, 272 money managers and 1,043 community investment institutions.
John Siciliano, director of PricewaterhouseCoopers' Asset Management Practice, noted that mission-based investment policies have been one of the primary drivers in the sector's growth among institutional subscribers.
"I don't think there's any question that there is a political necessity on the part of public funds to pay attention, and on the part of foundations and endowments; it's part of the mission to pay attention to these issues as well," Siciliano said, while noting that "the retail side is much more focused on the emergence of alternative retail products."
Pax World Management, which advises more than $2.8 billion in its suite of actively and passively managed sustainable investment strategies, is one of the trailblazers in the industry. According to SIF, the Pax World Balanced Fund-Individual Investor (PAXWX) was launched in 1971 and incorporates a balanced equity mix.
Pax' start included the use of direct investors through obtaining leads from direct phone calls and individually mailed-in check payments. But, it has transitioned to a business that includes 96% of its assets in financial advisor, fee-based advisor and broker-dealer circles, said Pax CEO and President Joe Keefe.
"A lot of the early funds in this space focused on screening out weapons, tobacco, gambling, alcohol and so forth, which was fine, but I think in the early days that was greeted skeptically," Keefe said in a phone conversation. "I think what you've seen in recent years is a transition from a focus on negative screening to a focus on positive ESG integration."
Positive ESG integration is gaining traction because the world population is caring more about sustainability given recent data for consumption of resources, said Kevin Parker, CEO of Sustainable Insight Capital Management (SICM).
"It's taken 1,850 years to put a billion people on the planet; another 150 years, and we've put 6 billion more on the planet, and over the next 20 years, we're putting another 2 billion to get to 9 billion total and that's having implications on resources," Parker stated.
New York-based SICM, a new asset management shop that looks to bring its specialist focus on green and sustainable investment equipped with a traditional financial world mentality, is looking to bring better research and management to clients, Parker said.
"There is this wall of money that is very interested in this arena, but heretofore, the asset management side has delivered up a rather inconsistent and disappointing solution," said the former global head of Deutsche Asset Management.
Supplanting values-based investing with a distinct investment process is also a metric utilized by Brown Advisory. The Baltimore and Washington, D.C.-based firm has over $2 billion in ESG-related assets under management. But as an attempt to add to its ESG suite, the firm's Sustainable Growth Fund (BIAWX), a mutual fund extension of a prior separately managed account, was launched in June 2012.
"The data is definitely out there that ESG related assets are growing, and the data also shows that a lot of it is growing from individual investors," said Karina Funk, portfolio manager of the fund. "However, there seems to be growth and interest in just about any category."
Brown Advisory's analysis uses environmental business advantages indicators to group its ESG holdings; the returns recipe includes research compounded by EBA that point to companies that use these strategies as drivers for earnings and growth.
"Some of our holdings might not be recognized for the environmental, business advantages and therefore may not show up in other funds, period," Funk explained. "We don't look for companies that say check the box in terms of sustainability reporting, or global reporting initiative."
As expectations for the future list that younger generations and women investors will assume a larger slice of the SRI pie both demographics will likely ask financial advisors for more ESG offerings.
