ESG Investing Is Hot. Today’s $8 Trillion Could Quadruple by 2030

Institutional investors in the U.S. are pumping more into sustainable funds.

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Sustainable investing worldwide stands at $8 trillion today and could reach $30 trillion by the end of the decade, a new assessment shows.

The report, released by Broadridge Financial Solutions, highlights this year’s strong numbers. From January through September, investors had poured $577 billion into mutual funds and exchange-traded funds dedicated to environmental, sustainable and governance—far exceeding the full-year total of $355 billion in 2020. 

The pace of ESG investing differs vastly around the globe. In Europe, the strategies drove all money going into actively managed local funds. In North America and Asia Pacific, the shares were much more modest—15% and 9%, respectively.

As of September, European managers identified more than 5,700 ESG funds under a new disclosure regulation by the European Union. with combined assets of $4.1 trillion. Many of these funds were repurposed—through better disclosure or portfolio adjustment—to align with the regulation.

The North American fund industry, on the other hand, lags well behind because it doesn’t have the same regulatory push. But catalysts such as the relaxing of ESG restrictions in retirement plans should help bump up the numbers, according to the report.

As of 2019, only 3% of 401(k) plans had an ESG option, and these accounted for just 0.1% of total plan assets. Compared to ETFs, mutual funds may stand to gain the most since they’re the main products in retirement plans, Jag Alexeyev, Broadridge’s head of ESG insights, wrote in the report.

Institutional investors in the U.S. are also pumping more into sustainable funds. Earlier this year, the BlackRock U.S. Carbon Transition Readiness ETF (LCTU) raised $1.25 trillion initial assets on its first day of trading, marking the largest ETF launch of all time. Much of the capital came from institutions such as California State Teachers’ Retirement System and a Finnish pension insurance company.

As the sustainable investment business grows larger, fund managers are facing ever more complex challenges and stricter scrutiny. Investors want better products beyond vague languages and a few exclusionary screens. And the huge opportunity means competition for new assets would be even more fierce.

Alexeyev noted that investors are now asking harder questions about data transparency and selection criteria––”greenwashing” has become a key risk to the credibility of asset managers. They also want clear objectives and measurable results—both in sustainable impact and investment outcomes.

These demands, he wrote, could hurt smaller asset managers who might not have the resources needed to build the infrastructure for delivering and reporting on sustainability products.

Write to Evie Liu at evie.liu@barrons.com