U.S. Investors Are Getting Serious About ESG. This Year’s Fund Flows Prove It.

Sustainable funds are attracting record inflows this year, as allocators increasingly emphasize environmental, social, and governance criteria.

Alex Kraus/Bloomberg

Alex Kraus/Bloomberg

Most U.S. asset owners say it’s important for their managers to have ESG capabilities. Fund flows suggest it’s not all talk.

According to Morningstar, U.S. sustainable funds attracted $21.4 billion in inflows in 2019 — more than four times higher than any previous year. In just the first three quarters of 2020, sustainable funds have already shattered that record, with year-to-date inflows hitting $30.7 billion in September.

The rapid increase in environmental, social, and governance investing in the U.S. comes as asset owners prioritize working with asset managers that take ESG factors into consideration. Among allocators surveyed by Cerulli Associates, 88 percent placed at least moderate importance on managers having ESG capabilities. Two thirds said they had ESG integration processes at their own organizations and that they considered environmental, social, and governance factors when hiring managers.

“The number of asset owners taking ESG criteria into account as part of their manager selection and termination process has steadily increased over the last five years,” Cerulli director Michele Giuditta said in a statement. “Allocators are evaluating asset managers’ ability to judge the risk and opportunity associated with material ESG considerations and apply them to sound investment decision-making.”

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The 200 asset owners surveyed by Cerulli reported a variety of criteria used to evaluate asset managers on ESG considerations. Nearly three-quarters said it was at least somewhat important for senior leadership at asset management firms to have accountability for ESG. Seventy-one percent believed it was at least somewhat important for a firm to have an articulated mission and culture of diversity and inclusion. Two-thirds said they judged the data sets that managers used to inform investment decisions.

Other “important” criteria included a manager’s proxy voting record and shareholder engagement history and the overall quality of the firm’s ESG integration process.

Investment consultants, who often serve as the gatekeepers to asset owner clients, similarly reported that it was at least somewhat important for managers to have ESG capabilities. Among the top-ten consultants, Cerulli reported that nine use a formal ESG rating or otherwise take ESG into account when making manager recommendations.

“Managers advertising their ESG capabilities need to display consistency and commitment at the firm level, demonstrating how the firm incorporates ESG criteria and providing transparency into active ownership activities — proxy voting, engagement, and shareholder resolution activities — to show alignment with the firm’s stated beliefs and views,” Giuditta said.