Sustainable investing, which set new records for global and U.S. asset flows through the third quarter this year, is expected to accelerate in 2022 and beyond as demand by institutional and retail investors grows along with offerings from global asset managers.
"Investing with a sustainable lens is foundational today," said Kunal Kapoor, in his keynote at the start of Morningstar's annual conference in September.
Underpinning that foundation is climate change and the risks it poses to the global economy, financial markets and individual companies during what many hope to be a transition to a net zero world where carbon emissions equal the amount of carbon removed from the atmosphere.
Through the third quarter global sustainable funds amassed almost $4 trillion in assets including more than $330 million in U.S. sustainable mutual funds and ETFs, which is almost twice the level of a year ago, according to Morningstar.
Net flows into U.S. sustainable funds grew to $56 billion in the period as 74 new sustainable funds launched – three-quarters of them equity funds.
"The net-zero transition isn't simply about reducing carbon; It's a business model transformation akin to the Industrial Revolution," wrote Michael Jantzi, founder of Sustainalytics, a Morningstar affiliate which provides, analytical environmental, social and governance (ESG) research, ratings and data to institutional investors and companies, in a recent report.
"Grappling with it is part of fiduciary duty… Investors are adopting ESG (environmental, social and governance factors) as part of the transition to a net-zero world."
Addressing Climate Change, Other Issues
Their investments are spurring companies to address not only climate issues but issues that impact workers, customers, communities and cline, according to Jon Hale, Morningstar's Global Head of Sustainability. He expects the influence of sustainability considerations on financial reporting, oversight, risk and regulatory frameworks will grow.
Indeed, the SEC is considering more stringent disclosure requirements on environmental, social and governance (ESG) issues by asset managers and by public companies, which could be adopted next year, and has already increased its reviews of both.
In the meantime, under Chairman Gary Gensler, the agency has been asking money managers to explain the standards they use for classifying funds as ESG environmental, social and governance-focused, according to Bloomberg News. It has also requested dozens of public companies to provide more information about how climate change might affect their earnings or operations, he Wall Street Journal reported.
