Sustainable investment has evolved in the US market less rapidly than in Europe to date due to multiple reasons, one of which has been less ambitious regulation at the national level. ESG policy has become a partisan issue and the current administration has rolled back regulation, bucking the global trend. A recent whitepaper from Morningstar said that in the US, where climate change is a ‘contested concept’ ESG investment factors must be justified by explaining ‘why’, while in Europe they must explain ‘why not’. Despite this headwind, assets under management in ESG-oriented funds grew 40% to €684bn over the four years to the end of 2018.
This demonstrates that the US corporate market isn’t immune to international pressures nor those from local state legislators, regulators and investors. US companies are significantly improving their approach to their industry challenges, motivated by three factors: 1) recognition that these issues can be material for consumers, employees and other stakeholders, b) appreciation of the effect this can have on long-term financials and industry competitive dynamic, and c) the risk of capital flows should they do nothing.
For a few examples of recent corporate actions:
- Chubb insurers announced this week that they will be the first US insurance company to stop insuring new coal-fired power plants and stop investing in companies with over 30% revenue exposure to thermal coal mining.
- Citi announced it has become the first US bank to sign the UN’s Principles for Responsible Banking under which it commits to prioritise the SDGs. The firm noted as motivation for this change: ‘as a company, we have young people who, as they consider careers, want to see that we have a broader societal purpose’
These are interesting developments for the US market, as companies making commitments and demonstrating a real effort to improve their approach to environmental, social and governance issues should be considered attractive investment opportunities.
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