The popularity of environmental, social and governance (ESG) strategies has soared in recent years as people of all ages with changing attitudes and perspectives have sought investments better aligned with their values.
ESG investing has seen significant growth, with assets under management (AUM) using ESG strategies jumping 42%, from $12.0 trillion in 2018 to $17.1 trillion in 2020, according to US SIF: The Forum for Sustainable and Responsible Investment. [Trillium Asset Management is a member of US SIF]. ESG investors care deeply about and are motivated by a variety of topics, many of which are interrelated.
And while some topics such as the climate crisis and social justice may attract more attention, ESG investors have long focused on other important issues such as the perils of toxic chemical pollution, and the severe cost of pollution’s harm to workers, communities and the environment.
Investors need to understand how companies are meaningfully managing the risks of toxic chemicals in products and supply chains, and moving toward safer alternatives.
For advisors, this presents an opportunity to help older clients forge stronger ties with younger generations and build continuity with theme-based wealth strategies.
Surveying the Chemical Footprint
The world is awash in chemicals. Scientists count 350,000 chemicals and mixtures of chemicals registered for commercial use — including 120,000 that can’t be conclusively identified. U.S. health agencies and governments list more than 2,000 chemicals exhibiting high risks to human health and the environment.
These endocrine-disrupting, bio-accumulative and potentially cancer-causing chemicals are found in consumer products, plastics, pesticides, food and drinking water. Chemicals have been important drivers of economic growth, but the cost of poor management and their long-term impact have been largely ignored.
The costs associated with environmental chemical exposures worldwide likely exceed 10% of global GDP or $11 trillion. In the United States, for example, poly and perfluoroalkyl substances (referred to collectively as PFAS), “forever chemicals” that scientists link to high cholesterol, thyroid diseases, and kidney and testicular cancers, have cost cities and towns enormous sums. Further, as stockholders of PFAS producers lost $82 billion in value between January 2018 and September 2020, investors know the short-term impacts — but the long-term costs are still mostly unknown.
Investors can play a role here by pressing companies to address the negative economic, social and environmental impact of toxic chemicals and invest in safer alternatives. To begin, they need to understand if and how companies are measuring their “chemical footprint,” or the total mass of any hazardous chemicals they use, and what they are doing to reduce it.
Companies Leading the Way
The good news is companies such as Herman Miller, Seventh Generation, HP, Inc., Reckitt Benckiser Group and others are staking out leadership positions. These companies are tackling the complications chemicals cause in supply chains through footprinting, while prioritizing measuring, reducing and disclosing chemicals of high concern, all of which can position them to better withstand regulatory scrutiny and meet consumer demands for greener, healthier materials. More companies need to do the same.
The Chemical Footprint Project (CFP) Survey gives companies, investors and other stakeholders a comparable, consistent reliable metric to track progress toward safer, greener and just chemicals. This independent third-party tool can be used to engage companies on toxic chemical risks, through a framework that evaluates management strategy, chemical inventory, progress measurement and public disclosure. The CFP now boasts endorsements from investors with over $2 trillion in AUM and purchasers with over $800 billion in procurement power.
After a successful multi-year engagement with Target to strengthen its approach, corporate managers began using the CFP Survey in 2018. The company subsequently removed several hazardous chemicals from products, and is using the framework to identify and remove other chemicals of concern, including banning intentionally added PFAS from textile products. Management also committed to using the framework to screen for and reduce toxic chemicals that may be found in products specifically marketed to women of color.
Benefits for Older Investors
ESG-related asset growth continues to build with 85% of the general population reporting an interest in sustainable investing, according to Morgan Stanley. As with other ESG topics, the work done by funds on chemical footprint reduction offers older investors a chance to connect with children and grandchildren, unifying families over a common cause to help build legacies and sustain generational wealth. These funds create a way to advocate for safer products, workplaces and communities.
“For older investors, investing in ESG funds is an opportunity to bond with younger generations, who have been a driving force behind ESG growth.”
For older investors, investing in ESG funds is an opportunity to bond with younger generations, who have been a driving force behind ESG growth. For advisors, it’s a chance to facilitate connections between the generations, helping them promote a common cause and tackle an issue that has become increasingly more urgent to companies and asset managers, largely as a result of shareholder activism.
This will require advisors to understand the vast ESG landscape, the variety of issues that ESG investors care about and work on, and the investment options and educational resources available to them. It means sitting down with clients to learn their motivations for sustainable investing and determine the products best suited for them. It also means understanding the shifting attitudes and preferences of their clients — and how one generation’s thinking locks into another.
Retaining Millennial Clients
Bridging that gap is particularly important for advisors concerned about shrinking client bases as baby boomers transfer roughly $30 trillion of wealth to their heirs. According to Ernst & Young, firms typically lose between 70% to 80% of assets when transferred from one generation to the next. Offering a broader array of sustainable investment options, including those that focus on chemical footprint reduction, could help retain millennial clients as well as attract new ones.
It’s also true that despite the pandemic-induced recession, sustainable funds managed to not only reduce investment risk, but also outperform traditional peer funds in 2020 — equity and bond funds outperforming, respectively, by 4.3% and 0.9% — according to the Morgan Stanley Institute for Sustainable Investing.
ESG investing has become the vehicle to understand companies that are creating sustainable products and services. As companies move away from toxic chemicals and toward safer and healthier alternatives, ESG investors — and their advisors — can take pride in having done their part in moving towards a better world.
Susan Baker and Elizabeth Levy, CFA, are, respectively, director of Shareholder Advocacy and portfolio manager & research analyst for Trillium Asset Management, which offers investment strategies and services that advance humankind toward a global sustainable economy, a just society, and a better world. For more information, please write to firstname.lastname@example.org.