Severe weather, green bonds, CEO pay, and equality in the workplace are among the issues that will be top of mind for impact investors in 2018.
With more than $8 trillion in invested assets in the US alone, environmental, social, and corporate governance—or ESG—strategies have moved into the mainstream. In 2018, investors will see some new issues come to the fore, while others continue ESG investing trends that have been emerging in recent years.
1. Integration of UN Sustainable Goals
In 2015, the United Nations published 17 sustainable development goals (SDGs) to end poverty, fight inequalities, and tackle climate change. Through 2017 and into 2018, many money managers and institutional investors are continuing their work to incorporate the goals into their portfolios and policy statements.
The SDGs are critical for investing because they provide a framework for fiduciaries, can spur GDP growth, and help assess both macro and micro opportunities and risks, said Kris Douma, director of investment practices at the Principles for Responsible Investment (PRI). “It’s about risk and return, but wherever you position yourself on that axis of risk and return, you will always have an impact on society,” Douma remarked at PRI’s Berlin conference.
2. Green Shoots in Green Bonds
Green bonds, one of the key ESG investing trends to watch, have flourished over the past 10 years. A report from Moody’s outlines record issuance in 2017 with sustained global momentum. Companies issued nearly $95 billion in the first three quarters, up 49% from last year. Moody’s forecasts more than $120 billion in issuance for all of 2017.
Some of the new growth is coming from emerging markets, which could signal a maturation of the green bond market. According to the Climate Bonds Initiative, China represents a large percentage of these new emerging market bonds, but green bonds have been issued or are in the works in India, Nigeria, Kenya, Morocco, and Malaysia.
3. Mitigating Risks from Climate Change
Natural disasters made history in 2017 with hurricanes and monsoons in Puerto Rico, Bangladesh, and Texas causing humanitarian crises and trillions in losses. It was the worst year on record for property losses, according to a survey of global insurers affiliated with Cambridge University. Only 30% of disasters over the past decade have been insured, leaving a shortfall of $1.7 trillion.
Severe weather and climate change fallout entail growing risks to financial performance, as noted by the Organisation for Economic Co-operation and Development (OECD). Risks include damage to balance sheets, regulatory fines, earnings losses, and even violent repricing. Mitigating these risks will remain one of the top ESG investing trends as managers and institutions factor potential impacts into their financial modeling.
4. A Busy 2018 Proxy Season
In 2018, most public companies will be required to report CEO pay ratios in their 2018 proxy statements. The new data could show the disparity between executive compensation and that of mainstream workers, long a priority governance issue. Some have questioned whether the rule would come to pass since members of the administration have explicitly called for its repeal. However, the SEC recently issued guidance on implementation, suggesting that it will, in fact, take effect.
The movement toward deregulation isn’t likely to dampen shareholder engagement as one of the key ESG investing trends in 2018, says a new report from the KPMG Board Leadership Center. Noting an active 2017 season on issues including climate change and board diversity, KPMG expect a busy coming year with more resolutions about sustainability and diversity.
5. Sexual Harassment on the Radar
A growing list of prominent people from across corporate America have been named in sexual harassment cases. Settlements have totaled millions of dollars, and high-profile firings are a regular fixture in the headlines. This makes sexual harassment a serious and growing investment risk. Companies that are seen to tolerate such behavior could pay in multiple ways, from customer boycotts and lost business deals to lower revenue and profit.
ESG investors have taken note. For example, the Impact Shares YWCA Women’s Empowerment ETF is scheduled to launch in the first quarter of 2018, according to Reuters. The nonprofit Impact Shares Corp, funded by the Rockefeller Foundation, is introducing the ETF to focus on companies with strong records on women’s issues and workplace harassment.
2018 is shaping up to be yet another year where impact investing advances, as more and more people take action to align their values with their portfolios.