Transcript by Kensho. 

Lindsey Hall: I'm Lindsey Hall, Head of thought leadership at S&P Global Sustainable1.  

Esther Whieldon: And I'm Esther Whieldon, a senior writer on the Sustainable1 Thought Leadership Team.

Lindsey Hall: Welcome to ESG Insider, a podcast hosted by S&P Global, where we explore environmental, social and governance issues that are shaping investor activity and company strategy. 

Esther Whieldon: In the sustainability world, there’s a regular report that paints a picture of sustainable investing trends. I’m referring to the biennial report from the US Forum for Sustainable and Responsible Investment, more commonly known as US SIF. 

Its latest report came out in December 2022. That report identified $8.4 trillion in total US sustainable investment assets under management at the beginning of 2022. To put that figure in context, $8.4 trillion is 12.6% of total US assets under professional management. These US SIF reports are important because they provide a detailed breakdown of US sustainable investing trends across all asset classes as well as topline figures that are frequently cited in other publications.

Lindsey Hall: US SIF's mission is to "rapidly shift investment practices toward sustainability, focusing on long-term investment and the generation of positive social and environmental impacts." And members represent about $5 trillion in assets under management or advisement. 

To learn more about the new report and the direction of travel for sustainable investing, we're speaking with US SIF CEO Lisa Woll. Lisa has been leading the forum since 2006, and now she's stepping down from that role. So Esther, what did you and Lisa talk about and what did you learn?

Esther Whieldon: Lisa tells me she has seen a real transformation in the way sustainable investing has been understood and discussed over the past 16 years. She also sees challenges ahead for sustainable investing in the US. You’ll also hear us discuss why this latest trends report found significantly less total sustainable assets under management compared to the previous iteration of the report. Now that 2020 report found that investors were considering environmental, social and governance factors across $17 trillion of professionally managed assets.

By the way, you'll hear Lisa mention rules proposed by the US Securities and Exchange Commission, or the SEC. One proposed rule involves corporate climate disclosures, and the agency has also proposed a set of rules that involve sustainable and ESG-labeled funds. You'll hear Lisa refer to that second set of rules as the names and fund disclosure rules. 

Lisa also mentions a rule the U.S. Department of Labor in November 2022 that rolled back a rule that would have made it harder for company-sponsored retirement accounts such as 401(k)s and pension plans to include ESG options in those funds. We'll include links in our show notes to other episodes where we explored those rules in greater detail. 

And by the way, Lindsey you'll hear Lisa also shared a bit of her personal story around sustainable finance including how she teaches her own kids about investing. Ok now let's turn to my interview with Lisa where she starts off by talking about how the sustainability field has changed over time.

Lisa Woll: When I look at how the field has changed when I came here in 2006, the field was pretty much called socially responsible investing. And a lot of my down was when I call the narrative job, which was to talk about the field in a way that would bring new entrants that would keep the firms that are already there active and that explained what it was trying to accomplish through looking at environmental, social and governance issues. So I considered my job to be very much, in some ways, a persuasion job, a defining job of what the field was on and an informational job. So talking to journalists, for example, who, back in those days, really still thought that socially responsible investing was only negative screening and had kind of missed 20 years of development to the field. And so a lot of what I did early on was to kind of reconstruct the history for journalists and others to correct misperceptions and outright misinformation and to create knowledge about the field more broadly so that it would draw more people and more firms into the field, more investors to invest in these kinds of funds and would allow US SIF, of course, to grow as well. 

Where we are today is what I call the regulatory, it's the regulatory moment -- so we've moved from a sort of narrative moment, which, of course, is always a narrative in my job into a regulatory moment where the field is at a point where both the size of it, the interest in it, the complexity of it has grabbed the attention of regulators all over the world, including here. And so that in and of itself was a big swing. 

Then USF was a founder of the Global Sustainable Investment Alliance. We put out a report on the global trends in the industry every 2 years. We meet together in person once a year, we talk to each other bimonthly. And so we have been able to watch and learn from countries and regions that have gone before us, such as what's happening in the U.K. and of course, the European Union, Australia, Canada. So it's been a real help to us to watch how different parts of the world have been rolling out their own kind of regulatory phase around sustainable investing.

Esther Whieldon: So we've had a lot of challenges societally in the last couple of years, right. We had COVID pandemic. Now we have inflation and economic issues. How have those issues affected how you're talking about sustainable investing and also what you're hearing from your members?

Lisa Woll: Well, I think it's really interesting because I have a viewpoint that what often happens is that issues end up showing up in the investment process because they're not being dealt with at a national policy level. So climate change, if you look at our trends report, which came out late last year, climate change for the first time was the leading issue for money managers, asset managers and asset owners. It always has been one of those issues for 25 years that has shown up as being incredibly important to sustainable investors broadly. 

But last year, it was the first time that it showed up as being the lead issue for both institutional investors and asset managers. So Climate is sort of a perfect example of an issue that continues to show up as an important an important issue for investors, whether in the private markets, public markets, fixed income because we still haven't grappled with it. We've got some new initiatives under this new administration. We're a long way from solving the climate crisis in a serious manner. 

What you've seen as well in the last 3 years, when COVID happened, there's a big conversation that all of a sudden started about what are the conditions for workers, what are conditions around health and safety? Why do so many workers not have sick leave? Why hasn't the minimum wage been raised nationally for eons? And those are issues that are now firmly in the lexicon of investment, looking at how workers are treated, looking at companies in terms of how they think not just about their stakeholders more broadly, but particularly about how they employ people, the benefits and the conditions -- that really, I think, got a much higher profile as a result of COVID. And of course, with the murder of George Floyd, the continuing police activity leading to death of largely black men but African-Americans more broadly. That surely has entered the investment process, looking at diversity, equity and inclusion, looking at what public and privately traded companies support prisons. And so those are all issues that when I look at them, I see that we are not dealing with them very well in terms of national policy. And until we do, they will continue to show up as investment issues as priorities because that's seen as at least one strategy to get at them. 

And of course, things like gender lens investing, gender lens investing, what's having a priority moment, probably more in the 10 to 8 years ago. But again, looking at issues of gender equality, not just here but around the world and where women are in companies where women are corporate boards, the kind of sexism they still face in multiple areas of their lives. That is very much now firmly entrenched in many of the ways that investors look at how they handle portfolios. 

One of the reasons that US SIF has a very, very strong policy program is because we firmly believe that systemic issues like poverty and minimum wage and issues around mass incarceration and prisons and climate, those are things that have to be dealt with by policymakers. Those are things that have to have systemic change. But I think particularly when they're not being dealt with effectively in the policy process, you begin to see them showing up in the investment process. And I think even when it is dealt with in a policy process, you'll still see investors using those issues and considering those issues. But I think oftentimes, they show up for the first time when they become big social issues and all of a sudden investors are realizing that perhaps this is something that is an ESG issue they need to look at. 

One of the things that I think has happened in the last couple of years, and we just added it to our list of issues to look at for the trends report is biodiversity. It's part of the broader conversation on climate change. It's part of a broader conversation about environmental integrity. But that is an issue that you're starting to see bodies like the UN deal with and investors are starting to address it as well. Again, I think investors in this particular situation probably are a little bit ahead of where policymakers are in terms of biodiversity. 

And so I don't know that you can say there's a kind of very neat process that causes just my observation sitting here in the seat for so long that this is often happening. And that doesn't mean that when a problem is addressed by policymakers finally, that it still won't be part of the investment process, but sometimes I think investors go in because they can do something about it right away. They do generally have more control over the decision-making and it is easier to add biodiversity, racial justice, gender lends to a portfolio to shareholder engagement than it is to get Congress to pass a bill. 

I think we also have to recognize that sustainable investment will never give the kinds of outcomes that substantial public policy will. And so expectations of the field must be in line with what is possible through any investment vehicle, be it private equity or public equity or through shareholder engagement and what is possible by systems change. 

So you can have the best sustainable investment firm go do a fantastic resolution and a minimum wage that they want a company to pay or we can change a minimum wage law that will affect all companies. I know where I would rather put my time. And so I think the issue is we need to push for the very, very best from the sustainable investment industry and from all the actors in it. But we also have to recognize that true sustainable change that affects people at a mass level that the investment world, the corporate world that they are incredibly important actors in this space, but that the most important actors is the federal government and their ability to make change. 

Like a great example of that, the Department of Labor. We worked closely with them for the last 4 administrations and whether retirement plans can include ESG-oriented funds. That would seem like a no-brainer. It hasn't been. It's gone back and forth multiple times. And here's the reality. Most Americans, if they have access to the stock market, it's through retirement plans. 

A lot of Americans do not have discretionary income to go and invest in a mutual fund or ETF -- so if we do not have sustainable investment options available in the majority of retirement plans in the country, then a lot of Americans will never have access to a sustainable fund at all. And so those are the sort of things that we like to think about here. It's why we've made retirement and sustainable lesson options available in retirement plans, a big part of our policy focus. We work very hard over 10 years to get the Federal Thrift plan, the largest plan in the United States for federal government to finally include some sustainable investment options. And just last year, that happened. This is a really important area to think about if we want to see more people have access to sustainable funds.

Esther Whieldon: Turning to the report you guys just put out in December, your sustainable investment trends report, which you've mentioned adding biodiversity, too. One of the notes, the top line findings that there were fewer sustainable investment assets, investing assets in 2022 than two years prior. What has contributed to that? And is that a trend we're going to see going forward?

Lisa Woll: So what I would say is this, had we kept the methodology that we had used for the 2020 report and all the reports prior to it, you would not have seen a diminution in assets. What we saw happen starting in 2014 was this new category called ESG integration. And between 2014 and 2020, that strategy of ESG integration, there's like 5 or 6 other strategies we consider to be sustainable investment strategies. -- grew exponentially. Like if you actually look at the chart, you can -- it almost looks like a ski slope. And finally, in 2020, we look -- took a look at the number and we took a look at the information we were getting from our respondents. In terms of specific ESG criteria, we decided we were no longer satisfied with the kinds of information you're getting from a broad range of investors. 

So 2 really interesting things happen then. Starting in 2021, we began to refine our methodology so that in order to have your assets included, you would have to show us actual ESG criteria, specific ESG criteria that you were using in the investment process, not just in your research pool, for example. Number two, and we did not expect this. The SEC during the time that the trend survey was open for submission, put out a proposal on the names rule, but more importantly, on fund disclosure, ESG fund disclosure. We've never seen a proposal like that. And what happened as a result of that is many of the asset managers who have responded to us in the past and gave us one number, we're now giving us numbers that were substantially smaller. And what we believe happened is when they saw that the SEC was going to start really defining what counted as ESG criteria and strategies that they took that proposal as basically what the rule would look like, and they started to count their assets in that way. 

So we had 2 really interesting things going on. We changed our own methodology and made it more prescriptive, and the SEC came out with a proposal and asset managers started to change the way they looked and define sustainable investment assets. And you also SEC go after several asset managers from misrepresentation, right? And so all of those things together start to create a message of we are expecting just much greater clarity around transparency and accountability. And so we kind of had this perfect, this perfect moment in which we saw 2 colliding but really similar shifts. And that's part of the reason that the number is so much -- is significantly smaller than it was. And we feel it's a very good change for US SIF and a good change for the industry.

Esther Whieldon: So if you could predict the next couple of years in terms of what you think is going to happen with sustainable investing. What would you say?

Lisa Woll: I think a whole lot more people will know what it is because we're having this giant political debate in cities and states across the country where I'm not sure issues around sustainable investing or ESG have ever been on the front page of a newspaper or a business paper. And so I look at this even though there's this anti-ESG critique going on from some part of the American political sector. And it's a really interesting teachable moment to have debates going on in places like Indiana, right, where there is an opportunity to talk to journalists about just covering the field more broadly so that their readers can learn more about this. 

So I think there's a really interesting moment where there's a much broader conversation going on about sustainable investment, not in a way that we necessarily think is very thoughtful or informative or actually right, nut it is bringing to a larger group of readers, the information that there is such a field. And so I think that's really interesting. I'm also hoping that the media themselves will use this as an opportunity to really learn more about this and cover this field much more broadly than they have in the past. 

I think that there's going to be a big conversation about materiality, 1.0 and 2.0 with 1.0 being "what is the impact on a company of looking at this ESG criteria, what are the opportunities and risks?" And the other one being kind of where the field started, right, when it was called socially responsible investing, which is "what is the impact on society of companies and the private sector and their impacts on social issues and environmental issues?" And that conversation is going on in, I would say, a relatively quiet way for the last several years, but I think there will be a much broader conversation. When I started here, most of the folks and the firms that were engaged in this field were doing it as part of a social change strategy. And then we entered a kind of another phase about 8 years after that when some of the bigger banks and financial services firms and asset owners got engaged where we started to talk about opportunity and risk, and it's just part of the financial process to include these issues. 

And now we're talking about all of those things together, that has been one of the great opportunities and challenges of my job is that in some ways, when I talk about the sustainable investment field, I'm talking about 2 or 3 different approaches to the field. And I have members who represent multiple approaches to the field. And so I think that's going to continue to play out.

And then I think the regulations will hopefully really help make clear to end users and investors precisely what they're investing in, give them more information about how to make decisions and make it easier to compare one financial institution to another. I also think investors will get much better disclosure than what they have right now. So what are we waiting for from the SEC right now, we're waiting for the climate change disclosure rule to come, we're waiting for the fund disclosure rule to come or waiting for the names rule to come. We expect there will be a proposal soon and even capital management disclosure and very much hope that investors will have much better ways to look at information from companies as a result of those disclosures. 

The other piece I'd add is I think while the SEC has been very interested in these issues and the Labor Department, if you want to talk about retirement in a bit, and the White House certainly is interested in these issues. We just launched in Congress, along with 2 members of Congress about 3 weeks ago, a sustainable investment caucus. And what that means is that not only do members of Congress recognize the growth and importance of this field to the financial services industry, but, at a broader level as well, but also that they see the relevance between the kind of policies they work on related to ESG issues and the kind of issues that sustainable investors are incorporating into the investment process. So all of these things are going to keep moving forward. And I think they're all very positive for the field.

Esther Whieldon: What are some of the biggest challenges ahead for the sustainability field?

Lisa Woll: Well, I can say at a super basic level, which is that I have one of my favorite topics is the functional financial literacy that you have so many people in the United States, which I frankly don't think is very different than most countries. But I've done a little bit of research just to look at what high schools provide basic, just some basic financial education before they graduate. And it is not the majority of states in this country. 

And so when people graduate from high school, unless they go into finance or business, many times, they become adults, and they have very little information about financial services industry, the difference between a stock and a mutual fund in the ETF and bonds, et cetera, I think that is a real issue for this country. And certainly, it impacts the ability of an American to understand what sustainable investment is when you probably don't have a great idea as a retail investor about what the investment shield is in general. 

So I just think we have an opportunity as people who are concerned about sustainable investment to think about how we expand financial literacy in this country. This is just something that I have a specific interest in. 

Esther Whieldon: Lisa also said the sustainable investing field is trying to create new products for retail investors. Here she is again. 

Lisa Woll: I think one of the challenges has always been how do you create more product for a retail investor vis-a-vis an accredited investor. And I still think that's one of the areas where being able to make a broader part of the market available to retail investors, a non-accredited investor that is still challenging. And I think it's something that people will continue to try and sell for in the next decade. 

I think the other piece that's really interesting, we haven't talked about it at all, is community investing institutions. So community credit loan funds, venture capital and banks, community credit unions and banks. That's an important part of our industry. And those are actors serving underserved communities in urban areas, rural areas, Native American reservations and communities and then overseas in things like micro finance. And I think those still remain investing opportunities that too many investors don't know about, especially at the retail level. So they may still be investing, let's say, in a big bank when they could be investing potentially in a local credit union or bank that's actually investing in their community.

And so that's another area where I think there's been a lot of interest in that the federal government has been very interested in credit unions and the CDFI movement in the last several years. But I still think it's too unknown to the average American investor, particularly retail investor, and I think more can be done there.

Esther Whieldon: And that goes back to that whole financial literacy question right, or challenge.

Lisa Woll: Right, financial literacy understanding the difference perhaps between a national bank and community credit union or loan fund. And these are just not things that were taught very much growing up. And I know I was self-taught and probably you might have been self-taught. Lots of people are self-taught and we don't necessarily know everything. We learn it as we go along.

Esther Whieldon: So fun fact that I haven't talked about in the podcast before, but I was part of an investment club when I was in college, and I learned a lot through just us looking at our stocks and reading the documents the company has put out and all of that. I was just fascinating to me. What has your experience been?

Lisa Woll: Yes. So I am probably after 3 years after I got out of college, I was running a small nonprofit. And one of the consultants I work with who was about 15 years older than me, she was self-taught investor, and I was fascinated by it because I knew so little. And so she sat down with me over a couple of lunches and I then read mutual funds for dummies and investing for dummies, and I love the dummy books by the way. And I just continue to teach myself I guess well enough that when I interviewed for this job, I didn't think I was completely helpless and thought I knew enough about the investment field to have this job. 

And then as I had children, I realized I wanted to raise them very differently in their knowledge of money. And so I taught them by looking at what is the trajectory of a stock over your lifetime and what would happen if you started to put tiny bits of money away when you are really young. And so the second, my kids got a job whether it's dog-walking baby setting or helping someone with their snow, I put it on Excel Sheet and I took 15% of it. And when they turn 20, the entire 15% was put into a retirement account for them so that they were starting very, very young. And they have loved this and it has -- what it has meant is they're much more interested and knowledgeable about finance than I was at their age and even 10 years older than them. 

So I think it's really important because we lack a way to teach children about finance, nationally, that if you're a parent and you're capable of doing this to make them excited about and make them understand what it means to start young, and then they love it. 

Esther Whieldon: So as you can hear, Lindsey, sustainable investing has evolved quite a bit since Lisa took over as US SIF CEO. We heard us say that the field has moved from what you called a narrative moment to a regulatory moment because of how much the field has grown over time. 

Lindsey Hall: We also heard Lisa articulate this theme we've been hearing a lot on the podcast, which is how achieving sustainable outcomes is going to require effort from a lot of different stakeholders, including financial institutions and governments. It's this all hands on deck approach.

Esther Whieldon: That's right. And please stay tuned as we continue to track how sustainable investing as well as related regulations continue to evolve.

Lindsey Hall: Thanks so much for listening to this episode of ESG Insider and a special thanks to our producer, Kyle Cangialosi. Please be sure to subscribe to our podcast and sign up for our weekly newsletter, ESG Insider. See you next time.

Copyright ©2023 by S&P Global  


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