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Trump: an unlikely catalyst for US impact investing

Enthusiasm for socially and environmentally responsible investing in the US has long lagged the immense size and influence of its financial sector. But under the Trump presidency, that may be changing. David Bell reports.

These are not halcyon days for environmental policy in the US. President Trump has moved to unwind much of his predecessor’s efforts in combatting climate change: abandoning the Paris COP 21 climate change agreement, appointing a former oil chief as the nation’s top diplomat and slashing the budgets of US science and environmental agencies.

For the small but growing number of key players in impact investing, the shift in federal policy has been a shock. But they have not been cowed. Instead, changes at a federal level have sparked a nationwide awareness of the battle to finance sustainable investments that might be the catalyst the movement needed.

“If the government is not going to take care of these systemic risks, that means we need to take action,” says David Richardson, executive director, business development at Impax Asset Management. The firm has grown its US assets from around $50m in 2012 to over $6bn, he says, with changes to federal policy prompting “dramatic growth” in interest from US investors. “Corporate America has stepped into the breach,” he says.

SRI Report

Industry leaders are bringing SRI themes into the mainstream. BlackRock CEO Larry Fink used his 2018 letter to investors to highlight growing expectations on the private sector to meet sustainability challenges being abandoned by certain governments, hinting at a shift in how investors and companies consider social and environmental responsibilities, as well as the bottom line.

“There is increasing acknowledgement among asset managers that usual behaviours cannot continue,” says Fran Seegull, executive director at Impact Investing Alliance.

‘Congress holds purse strings’

They are being joined by influential players across society. In June 2017, US mayors, governors and business leaders signed the ‘We Are Still In’ declaration, a “promise to world leaders that Americans would not retreat from the global pact to reduce emissions and stem the causes of climate change” after the country withdrew from the Paris agreement.

Congressional champions have also stepped up, says Seegull, with a bipartisan caucus being built around sustainable investing issues. “This is important, because it’s Congress that holds the purse strings, not the president,” she says.

And, as the federal government retreats from climate change efforts, “there is a new spotlight on mayors and state governors, and many are stepping in and taking climate change very seriously, working in a co-ordinated fashion,” she adds.

This is reflected in the growth of municipal green bonds. Volumes rose from $4.1bn in 2015 to $11.05bn in 2017, with predictions for over $20bn this year.

Asset managers are creating products to take advantage of the trend. In June, Neuberger Berman changed a municipal bond fund to create a municipal impact fund to invest in investment and non-investment municipal bonds targeting positive social and environmental outcomes.

Funds targeting SRI investments across the financial sector are surging. This reflects how interest in ESG efforts has ramped up “aggressively”, says Jonathan Bailey, head of ESG at Neuberger Berman.

“In 2015, [ESG] was mentioned on about 5% of due diligence questionnaires by our US institutional investors. By 2017, that had gone up to 55%,” he says. “It’s still a lower proportion than our European and Australian clients, but it gives you an indication of the increased focus.”

The rise of municipal issuance complements the pool of corporate issuers and agency debt that previously underpinned the green fixed income market. The highly scalable financing tool of securitization, as a means of financing green assets such as solar panels and energy efficient real estate, is also starting to take off, creating a broader range of fixed income opportunities.  

“We’ve moved away from a time when the main issuers were SSAs, issuing three or five year debt at negative rates. The big evolution of the market is that securities are now being created where the investor is much more directly tied to the impact that they want to achieve,” says Stephen Liberatore, manager of the TIAA-CREF Social Choice Bond Fund.

More broadly, there is increasing awareness that sustainable investing means more than just growing the green bond market, even if, as Bailey says, fixed income represents the best opportunity to grow the application of ESG investment techniques.

“It’s created a healthy appetite for a broader conversation about ESG — what influence can you, as an investor, have over companies?”

Expectations of a massive shift of wealth from baby boomers to a younger, more environmentally and socially conscious generation might help cement this way of thinking.

According to a US trust study, there is a coming $40tr wealth transfer in the next 30-40 years to women and millennials, “two groups that are very interested in investing according to their values,” says Seegull. “This will catalyse a sea change in investment practices,” she says.

Richardson agrees. “Millennials are having a greater influence on investment portfolios, and they don’t feel like investing in the same way [as previous generations],” says Richardson. “Investment committees are paying attention to these trends.” 

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