By Reed Landberg, Annie Massa and Demetrios Pogkas
Climate change may still be a matter of debate for some politicians, but investors are increasingly decisive. Money is gushing into any kind of asset labeled green or sustainable. The frenzy now has investors and firms alike grappling with what counts as “green finance”—and with funds that are no longer seen as green enough.
At least $30.7 trillion of funds is held in sustainable or green investments, up 34% from 2016, according to a report by the Global Sustainable Investment Alliance, a group of organizations tracking those moves in five regions from the U.S. to Australia. Overall, these money flows account for one-third of the tracked assets under management, and in some places have reached more than half.
Sustainable Assets Are a Big Deal
Share of total managed assets in 2018
The shift comes even as U.S. President Donald Trump loosens environment and climate change regulations and promotes rules benefitting polluters. It’s helped spur companies from the oil major Royal Dutch Shell Plc to the mining giant Glencore Plc to set environmental targets for the first time, bringing to boardrooms a political agenda demanding action to limits for greenhouse gases.
“People are surprised at how much the private sector has taken this really seriously,” said Anjuli Pandit, head of corporate sustainability in the U.K. for BNP Paribas SA. “For the first time, all these players are asking each other the questions they should have been asking for a long time.”
Renewables developers have drawn in pension funds to back new projects, offering securities with steady yields backed by contracts to sell electricity. That helped create a market for green bonds and loans that barely existed a few years ago, as BloombergNEF data show.
A New Green Market
Sustainable debt issued by instrument type
- Green bond
- Sustainability bond
- Social bond
- Sustainability-linked loan
- Green loan
50
100
150
200
$250B
2012
2013
2014
2015
2016
2017
2018
“It’s stable predictable cash flows,” said Christine Brockwell, senior investment manager overseeing a European renewables fund at Aquila Capital, which manages 8.2 billion euros ($9.2 billion). “There are few alternatives out there that give a steady income linked to regulated contracts.”
Some investments are likely more “green” than others. There’s no agreed definition for what counts as green or sustainable finance. Some asset managers want to back only pollution-free energy. Others count efficiency or even a strict series of policies on social issues.
There’s concern that wide definitions of sustainability aren’t meaningful, allowing some funds to sell themselves as green or ethical even though they aren’t good for the environment.
“Many finance institutions are not entirely sure what the universe should be, but everyone is getting involved so they will too,” said Dan Shurey, who tracks green bonds and green loans at BloombergNEF.
The GSIA has the broadest definition, counting any kind of fund that uses a strategy associated with sustainability. The biggest and oldest strategy is negative or exclusionary screening, which filter out support for undesirables from oil to weapons, tobacco and alcohol. It accounted for $19.8 trillion of the sustainable assets managed last year, up 31% since 2016. The GSIA also counts those that buy “best-in-class” assets on certain measures or that follow rules on environmental, social and governance, or ESG. Funds that engage corporate boards or that encourage shareholder action also make the cut.
Where the Money Goes
Totals of sustainable investing strategies in 2018
Negative/exclusionary screening $19.8T
ESG integration 17.5
Corporate engagement 9.8
Norms-based screening 4.7
Best-in-class screening 1.8
Sustainability themed investing 1.0
Impact/community investing 0.4
Negative/exclusionary screening
$19.8T
ESG integration
17.5
Corporate engagement
9.8
Norms-based screening
4.7
Best-in-class screening
1.8
Sustainability themed investing
1.0
Impact/community investing
0.4
Negative/exclusionary screening
$19.8T
ESG integration
17.5
Corporate engagement/shareholder action
9.8
Norms-based screening
4.7
Best-in-class screening
1.8
Sustainability themed investing
1.0
Impact/community investing
0.4
In addition to broader strategies for green investing, more funds are divesting from fossil fuels, according to a study by 350.org, a campaign group that wants to limit funding for oil and coal companies.
By the middle of May, it counted 1,048 institutions managing $8.73 trillion as having some sort of strategy restricting funding for fossil fuels. And both of those figures have more than doubled in the past four years.
The group reckons that its campaign has outpaced all previous divestment movements, including those targeting tobacco and South Africa during the apartheid era.
Shying Away from Fossil Fuel Companies
Total assets under management of funds committed to divestment
5
$10T
2013
2014
2015
2016
2017
2018
Change is afoot in the equity markets too. The value of green or ESG funds traded on exchanges hit a record $41.6 billion last year, according to data compiled by Bloomberg Intelligence.
Equity Markets Get Greener
Total assets under management of ESG and sustainability-themed funds
9
18
27
36
$45B
2013
2014
2015
2016
2017
2018
The growth of green finance seems certain to continue as most governments worldwide focus on how to cut pollution and greenhouse gases and more regulators require companies to disclose climate-related risks—leading to more data showing which companies are most exposed and better insight about how to make money while saving the planet.
