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ESG: Growth Is Welcome, But What Drives Actual Change?

It’s not possible to make meaningful progress on “E” and “S” if “G” isn’t solidly in place.

Encouraging news arrived late last year about the fast growth of investments managed with attention to environmental, social and governance (ESG) factors. Seventeen trillion was the headline dollar figure in the latest biannual report from trade association US SIF, which tracks the responsible investing industry. 

Seventeen trillion represents a 42% increase over the dollar level US SIF found just two years ago. Today 33% of professionally managed dollars in the U.S. is invested with at least some consideration to ESG issues. 

That headline growth is impressive and welcome, but I’m actually more struck by some of the undercurrents in the report, particularly with respect to what investors say is most important to them.

From Governance to Environment to Social … and Now Back to Governance  

Of the three letters in “ESG,” it’s fair to say the “G” came first, in the sense of widespread awareness of the benefit of applying the concept as an investment factor. The level of a board’s independence—for example, by incorporating independent chair and CEO roles—came up for widespread awareness in the 1980s, as did the level of executive pay. 

Then, roughly speaking, the 1990s saw more investors embracing environmental issues as well—a trend that started with clean air and water and has more recently risen to global resonance with the focus on climate change. 

Only in the last few years have social issues risen to the top of investors’ motivations. In its 2020 report, US SIF reports that asset managers weighted social issues slightly higher than either governance or environmental issues. And institutional investors, such as pension funds, now apply social criteria to 92% of their investments. Examples include conflict risk, human rights, community well-being, health, diversity and inclusion, and affordable housing. 

These trends seem broadly in line with the rising awareness among citizens of social strains—most prominently about racial injustice in 2020. But it’s one thing to make social issues criteria for investment selection. It’s another thing to focus on what will actually create positive change along social dimensions at companies and in society at large. 

And that’s where we circle back to where we started: “G” for governance. It’s not possible to make meaningful progress on “E” and “S” if “G” isn’t solidly in place. I think more asset managers and institutional investors are recognizing that truth—and therefore sharpening further their focus on governance.  

I also see good governance as benefiting from attention at the public-policy level. US SIF and other organizations championing responsible investing have been increasingly active in the political sphere.

Another factor prompting stakeholders to revisit governance is simply the passage of time. Key dates—such as the Paris Accords’ 2050 emissions targets—are approaching quickly. That time pressure is perhaps felt more keenly now that we’re out of the teens and into the twenties. And we’re also far enough along on some dimensions that examples of positive change are available to reference. Europe is further along the renewable-energy curve than we are here in the U.S. China is further along the electric-vehicle curve. This progress hasn’t tanked their economies. Recognizing that progress, many stakeholders in the U.S. are working hard to accelerate action here. 

“Mainstreaming” of Awareness at the Citizen Level Is Driving Change

Critically, it’s not just advocacy groups and “enlightened” corporate citizens who see a path forward and want to move along it. 

Many of today’s issues—from “E” to “S” to “G”—are increasingly recognized for their importance at the citizen level. A prime example is electric cars, which are no longer a novelty. Tesla, in particular, has brought them to everyday consciousness. 

And that everyday awareness is absolutely critical to prompting sustainable change. Social-issue advocates have been effective in getting society to care more deeply about the planet and all people.

This raising of public consciousness is the ultimate “stakeholder” input, because management teams recognize that they cannot afford to alienate their customers, employees and vendors. 

This is one clear reason why ESG is here to stay. Companies themselves are taking action to improve, not just because they are forced to but because they recognize that sustainability is imperative to the long-term success of society—and therefore, their businesses.

Lessons from COVID-19

The data in the US SIF Trends report runs through 2019, so we’ll have to wait to see how the strains and tumult of 2020 will affect the percentage of assets invested along ESG dimensions. But when we do see the data, I’m certain it will reflect continued growth. 

Besides growing societal awareness of critical social issues, the impacts of COVID-19 may further prompt attention to ESG matters. Think back to last spring, when meatpacking plants had to shut down due to sick employees. How would things have been different if those companies had in place workplace policies more respectful of their workers’ needs? What could they have done to prevent sick workers from coming to work because they felt they needed to in order to preserve their jobs? What if workplace conditions were less cramped?  

Any and all of these factors could have enabled meatpackers to be more resilient—and therefore avoid lost revenues and profits. More importantly, they may have prevented COVID-stricken workers from infecting their families, communities, and so on, which may have reduced the overall spread of the virus. And here achieving greater resilience means progress along ESG dimensions—from the perspective of the company and society overall.

The bottom line here is that a lack of attention to ESG factors can be masked during good times. In bad times, failure to employ sustainable business practices will be laid bare. While many businesses have recovered from this external shock, the hope is that the lessons learned will prompt real change that will protect all stakeholders—people, planet, and ultimately, shareholders.

Crucially, it’s not only investors who see this. Individuals see it. And management teams are beginning to see it, too.

And that’s why I predict the coming year’s shareholder engagement efforts—an activity central to our work here at Riverwater—are likely to be as or more successful than ever. 

Ultimately, it’s change we want to see. While the growth in assets invested along sustainable and  responsible investing dimensions is encouraging, what’s more so is attention to what really drives change. With the mainstreaming of awareness and companies’ own steps toward resilience, we’re seeing especially welcome progress. 


Cindy Bohlen, CFA, is Chief Mindfulness Officer & Analyst at Riverwater Partners, which manages ESG strategies for institutions and individuals with a focus on small- and mid-cap stocks. Learn more at


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