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    Launching and Managing an Impact Venture Capital Fund: A Guide for Fund Managers and Sustainable Entrepreneurs
    Launching and Managing an Impact Venture Capital Fund: A Guide for Fund Managers and Sustainable Entrepreneurs
    Launching and Managing an Impact Venture Capital Fund: A Guide for Fund Managers and Sustainable Entrepreneurs
    Ebook401 pages5 hours

    Launching and Managing an Impact Venture Capital Fund: A Guide for Fund Managers and Sustainable Entrepreneurs

    By Alan S. Gutterman

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    About this ebook

    Entrepreneurs, and the new ventures they lead, have been recognized as major engines for the creation of sustainable products and processes that can be used to solve many difficult social and environmental problems.  Since venture capitalists focus on nurturing entrepreneurship and new ventures, they have an important role in the development, growth and maturation of these sustainable businesses.  Venture capital is well suited to the inherent riskiness and longer evolution cycles of sustainable startups: they specialize in identifying and investing in riskier businesses, companies that banks and traditional private equity firms are reluctant to support until they are further along in the development of their technologies and products, and working with them to grow faster, create more value and generate more employment and innovation over an extended period of time.  This book focuses on an emerging subset of venture capital firms that practice impact investing (i.e., investing made with the intention to generate positive, measurable social and environmental impact alongside a financial return).  These sustainable, or impact, venture capital funds make investments in technologies, processes or products with positive environmental, social and economic outcome and direct their investment activities and support on small-scale, young firms with excellent development capabilities that can deliver triple bottom line results.  The book begins with an overview of impact investment and then dives into the practical "nuts and bolts" of practicing impact venture capital and launching and managing an impact venture capital fund.  The book also discusses the process of "doing the deal" with investees and incorporating impact investment principles into contracts and post-investment relationships.  The critical role of impact measurement, management and reporting is also discussed.  The work is intended to demonstrate how the impact venture capital sector can fulfill its promise as important contributor to developing and implementing innovative and financially viable solutions to achieve society's aspirations for sustainable development and progress.

    LanguageEnglish
    PublisherSustainable Entrepreneurship Project
    Release dateAug 31, 2024
    ISBN9798227643742
    Launching and Managing an Impact Venture Capital Fund: A Guide for Fund Managers and Sustainable Entrepreneurs
    Author

    Alan S. Gutterman

    This book was written by Alan S. Gutterman, whose prolific output of practical guidance and tools for legal and financial professionals, managers, entrepreneurs, and investors has made him one of the best-selling individual authors in the global legal publishing marketplace.  Alan has authored or edited over 300 book-length works on entrepreneurship, business law and transactions, sustainability, impact investment, business and human rights and corporate social responsibility, civil and human rights of older persons, and international business for several publishers including Thomson Reuters, Practical Law, Kluwer, Aspatore, Oxford, Quorum, ABA Press, Aspen, Sweet & Maxwell, Euromoney, Business Expert Press, Harvard Business Publishing, CCH, and BNA.  His cornerstone work, Business Transactions Solution, is an online-only product available and featured on Thomson Reuters’ Westlaw, the world’s largest legal content platform, which covers the entire lifecycle of a business.  Alan has extensive experience as a partner and senior counsel with internationally recognized law firms counseling small and large business enterprises, and has also held senior management positions with several technology-based businesses including service as the chief legal officer of a leading international distributor of IT products headquartered in Silicon Valley and as the chief operating officer of an emerging broadband media company.  He has been an adjunct faculty member at several colleges and universities, and he has also launched and oversees projects relating to promoting the civil and human rights of older persons and a human rights-based approach to entrepreneurship.  He received his A.B., M.B.A., and J.D. from the University of California at Berkeley, a D.B.A. from Golden Gate University, and a Ph.D. from the University of Cambridge, and he is also a Credentialed Professional Gerontologist (CPG).  For more information about Alan and his activities, please contact him directly at [email protected], follow him on LinkedIn (https://www.linkedin.com/in/alangutterman/), and visit his personal website at www.alangutterman.com to view a comprehensive listing of his works and subscribe to receive updates.  Many of Alan’s research papers and other publications are also available through SSRN and Google Scholar.

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      Launching and Managing an Impact Venture Capital Fund - Alan S. Gutterman

      Copyright Matters and Permitted Uses of Work

      Copyright © 2024 by Alan S. Gutterman.  All the rights of a copyright owner in this Work are reserved and retained by Alan S. Gutterman; however, the copyright owner grants the public the non-exclusive right to copy, distribute, or display the Work under a Creative Commons Attribution-NonCommercial-ShareAlike (CC BY-NC-SA) 4.0 License, as more fully described at http://creativecommons.org/licenses/by-nc-sa/4.0/legalcode.  Version Date: 083124.  This Work has not been updated since the Version Date and any developments or changes occurring after that date are not reflected in this Work.

      1

      Sustainable Finance

      _______________

      Sustainable finance has been explained to be a long-term approach to finance and investing, emphasizing long-term thinking, decision-making and value creation, and has also been described as the interrelationships that exist between environmental, social and governance (ESG) issues on the one hand, and financing, lending and investment decisions, on the other and long-term-oriented financial decision-making that integrates ESG considerations.  Sustainable finance has emerged in parallel to aggressive policy initiatives such as the UN’s Sustainable Development Goals and the Paris climate agreement of 2015 as it has become clear that they cannot be realistically undertaken and completed without innovative private sector financing models that allow a wide range of potential investors to participate in high growth, albeit risky and uncertain, opportunities.  This chapter introduces sustainable investment strategies, the market for sustainable investment, issues for banks and other commercial financing institutions, blended finance and the various types of sustainable bonds. 

      _______________

      In recent years governments have debated and established ambitious public policy initiatives such as the 2030 Agenda for Sustainable Development and its broad range of Sustainable Development Goals (SDGs) including reducing poverty worldwide and promoting sustainable economic growth, and the Paris climate agreement of 2015.  Funding these initiatives would require the deployment of massive amounts of external financing, much of which would need to come from governments in the form of official development assistance, which has been defined as government aid that promotes and specifically targets the economic development and welfare of developing countries.  Multilateral development banks (MDBs), which are created by governments including the World Bank and International Monetary Fund, would also need to play a significant role in stimulating and channeling aid into developed, low income and emerging companies, and other significant external financing assistance would be needed such as philanthropic assistance through foundations, international sovereign bond issuances across various multilateral institutions including MDBs, development institutions and supranational organizations, and climate finance through public-private partnerships. Capital for development projects would also need to be provided by financial institutions, insurance funds, pension funds and impact investors, and organizations active in the startup community are ramping up their support for sustainable entrepreneurship.[1]

      Sustainable finance has emerged in parallel to the policy initiatives mentioned above as it has become clear that they cannot be realistically undertaken and completed without innovative private sector financing models that allow a wide range of potential investors to participate in high growth, albeit risky and uncertain, opportunities.  Sustainable finance has been explained to be a long-term approach to finance and investing, emphasizing long-term thinking, decision-making and value creation, and has also been described as the interrelationships that exist between environmental, social and governance (ESG) issues on the one hand, and financing, lending and investment decisions, on the other, and long-term-oriented financial decision-making that integrates ESG considerations.[2]  According to the CFA Institute, examples of environmental issues include climate change and carbon emissions, air and water pollution, biodiversity, deforestation, energy efficiency, waste management and water scarcity; examples of social factors include customer satisfaction, data protection and privacy, gender and diversity, employee engagement, community relations, human rights and labor standards and examples of governance factors include board composition, audit committee structure, bribery and corruption, executive compensation, lobbying, political contributions and whistleblower schemes.[3]

      On its webpage describing sustainable finance, the European Commission (EC) explained that the term referred to the process of taking ESG considerations account when making investment decisions in the financial sector, leading to more long-term investments in sustainable economic activities and projects.[4]  Examples of environmental considerations offered by the EC included climate change mitigation and adaptation, as well as the environment more broadly, for instance the preservation of biodiversity, pollution prevention and the circular economy[5], while social considerations included issues of inequality, inclusiveness, labor relations, investment in people and their skills and communities, as well as human rights issues.  The EC argued that the governance of public and private institutions (including management structures, employee relations and executive remuneration) was fundamental to ensuring the inclusion of social and environmental considerations in the investment decision-making process.[6]

      The interest of the EC in sustainable finance has been driven by the European Green Deal, which is a growth strategy announced in December 2019 that seeks to make Europe the first climate neutral continent by 2050.[7]  The EC has acknowledged that the scale of the investments necessary to achieve the desired transition to a climate-neutral, green, competitive and inclusive economy is beyond the capacity of the public sector alone (e.g., in January 2020 the EC presented its European Green Deal Investment Plan that called for mobilization of at least €1 trillion of sustainable investments through the period ending in 2030), and that channeling private investment into the transition to a climate-neutral, climate-resilient, resource-efficient and fair economy, as a complement to public money, is essential for delivering the policy objectives under the European Green Deal and achieving the international commitments of the European Union (EU) on climate and sustainability objectives.

      Capital for sustainable finance is available from investors who want to take part in financing enterprises involved in projects with high environmental or social value, including projects that will have an impact that the investors may experience directly; socially-responsible investment funds capitalized by institutional and private investors; pension funds and private banking and wealth management sources expected to grow significantly in the coming decades due to wealth transfers from Baby Boomers and Generation X to Millennials who surveys indicate have a strong commitment to incorporate social change into their investment decisions.[8]  Sustainable finance is just not about doing good, in fact consultants such as McKinsey have argued that companies with a robust ESG framework are more likely to add value as compared to companies that have not developed sustainable practices and that ESG creates value in several different ways including top line growth, cost reductions, reduced regulatory and legal interventions, employee productivity uplift and investment and asset optimization as key enablers in generating a long-term advantage.[9]  More and more companies are issuing financing instruments based on specific promises of use of the funds for environmental and/or social projects, and stock exchanges are facilitating these offerings by mandating more robust ESG disclosures.  The actions of all these actors are influenced by the priorities identified by non-profit think tanks, philanthropists, social change activists and enablers and civil society.[10]

      _______________

      International and Regional Sustainable Finance Initiatives

      The international policy context relating to the development of sustainable finance has been driven by the initiatives and actions of the following organizations:

      OECD: In 2016, the OECD established a Centre on Green Finance and Investment to help catalyze and support the transition to a green, low-emissions and climate-resilient economy through the development of effective policies, institutions and instruments for green finance and investment.  OECD work on the environment helps countries design and implement policies to address environmental challenges and sustainably manage their natural resources. The OECD’s analysis covers a wide range of areas from climate change, water and biodiversity to chemical safety, resource efficiency and the circular economy, including keeping track of how countries are performing across a range of environmental indicators. The OECD works with governments at all levels, including in developing and emerging economies, with civil society, and the private sector to drive effective action to meet environmental goals, including through aligning and scaling up finance and investment.

      G20: In 2021, the G20 Finance Ministers and Central Bank Governors endorsed the establishment of the G20 Sustainable Finance Working Group. The Group aims to mobilize sustainable finance as a way of ensuring global growth and stability and promoting the transitions towards greener, more resilient and inclusive societies and economies. The Group is tasked to identify institutional and market barriers to sustainable finance and to develop options to overcome such barriers and contribute to a better alignment of the international financial system to the objectives of the 2030 Agenda and the Paris Agreement.

      Financial Stability Board: In 2015, the Financial Stability Board (FSB) established the Task Force on Climate-related Financial Disclosures (TCFD) to develop recommendations, which were eventually published in 2017, for more effective climate-related disclosures.  In 2021, the TCFD published guidance on climate-related financial disclosures including metrics, targets and transition plans.[11]  In June 2023, the IFRS S1 and IFRS S2 standards were issued by the International Sustainability Standards Board, and both fully incorporated the recommendations of the TCFD, which was disbanded in October 2023.

      International Monetary Fund: Since 2019, the International Monetary Fund (IMF) has focused on the link between sustainable finance and financial stability, acknowledging that ESG issues can have a material impact on firms’ performance and on the stability of the financial system more broadly.  Analytical work of the IMF relating to climate change has examined policy issues such as an international carbon price floor, the transition to a green economy, border carbon adjustments, scaling up private climate finance in emerging market and developing economies, strengthening climate information architecture, fiscal policies to support adaptation, and green public investment and public financial management.

      The World Bank: The World Bank Group (WBG) long-term finance unit has been active in promoting Sustainable Finance globally though data provision, analytical work, instrument design and technical assistance to support regulators and investors to green their financial systems. The WBG issued the world’s first green bond in 2008, creating a blueprint for sustainability across markets, and it is the biggest multilateral funder of climate investments in developing countries. The World Bank Climate Change Action Plan 2021-25 aims to increase climate finance to reduce emissions, strengthen climate change adaptation and align financial flows with the goals of the Paris Agreement.

      Central Banks and Supervisors Network for Greening the Financial System: The Central Banks and Supervisors Network for Greening the Financial System (NGFS), established in December 2017, is a group of over 114 Central Banks and Supervisors exchanging experiences, sharing best practices, contributing to the development of environment and climate risk management in the financial sector, and mobilizing mainstream finance to support the transition towards a sustainable economy. The NGFS has been actively publishing various reports and guides on integrating climate-related and environmental risks into supervision, climate scenarios and climate scenarios analysis for central banks and supervisors, implications of climate change on monetary policy, climate-related disclosure for central banks and other relevant topics.

      International Organization of Securities Commissions: In 2018, the International Organization of Securities Commissions (IOSCO) established its Sustainable Finance Network (SFN) to allow members to exchange experiences and gain a better understanding of sustainability issues, including the details of issuer disclosures, their relevance to investor decision-making and the level of uptake and the implementation of industry-led initiatives, and to have structured discussions around these issues. In February 2020, the SFN was replaced by the Sustainability Task Force, which has focused on improving sustainability–related disclosures made by issuers and asset managers; collaborating with other international organizations and regulators to avoid duplicative efforts and to enhance coordination of relevant regulatory and supervisory approaches; and preparation of case studies and analyses of transparency, investor protection and other relevant issues within sustainable finance to illustrate the practical implications of its work.

      International Association of Insurance Supervisors: In 2017, the International Association of Insurance Supervisors (IAIS) identified climate risk and sustainability as a strategic focus.  The IAIS’ work on climate change spans across many activities such as financial stability risk assessment, development of supervisory and supporting material and capacity building.  The IAIS has focused on promoting a globally consistent supervisory response to climate change and providing supervisors with the necessary tools to monitor, assess and address climate-related risks to the insurance sector.  

      Sources: Annex A (Summary of international policy context relating to sustainable finance developments) in Financial Consumers and Sustainable Finance: Policy Implications and Approaches (OECD, 2023).  Reference should also be made to the compendium of international and regional initiatives to further green and sustainable finance compiled by the International Capital Market Association and the list of sustainable finance organizations maintained by Swiss Sustainable Finance.

      _______________

      Sustainable Investment Strategies

      Sustainable finance is a term that is often used interchangeably with sustainable investment, and defining sustainable investment has long been a problem with universal agreement yet to be achieved.  The Global Sustainable Investment Alliance (GSIA) has noted that the term may be used interchangeably with responsible investment and socially responsible investment, and that there are also distinctions and regional variations in usage of the term.  In addition, the same investment product or strategy may combine several investment strategies.  Sustainable investing was originally based on negative/exclusionary or screen approaches that excluded individual assets or sectors from consideration for inclusion in a portfolio based on moral or ethical considerations. While, as discussed below, it has been estimated that negative/exclusionary screening continues to represent the largest category of sustainable investment, the market has gradually expanded to include additional categories.

      The GSIA’s own articulation of sustainable investment strategies was initially published in its 2012 Global Sustainable Investment Review and emerged as a global standard of classification.  The GSIA definitions of the strategies were revised in October 2020 to reflect the most up-to-date practice and thinking in the global sustainable investment industry, and in its 2020 Global Sustainable Investment Review the GSIA defined sustainable investment as a term that is inclusive of investment approaches that consider ESG factors in portfolio selection and management across seven strategies of sustainable or responsible investment[12]:

      ESG integration: ESG integration involves new and emerging methodologies intended to systematically and explicitly include ESG risks and opportunities into traditional financial-based investment analysis.  ESG integration differs from ESG indexing mentioned above in that it does not rely on benchmarking ESG performance vis-à-vis peers.  As with ESG indexing, companies need to understand the how investment analysis taking ESG risks and opportunities into consideration is conducted, not only to gain a better understanding of the expectations of investors but also to potentially improve their own risk-adjusted rate of return on assets and mitigate sustainability-related risks.  ESG integration has become the second largest category of sustainable investment following negative/exclusionary screening.[13]

      Corporate engagement and shareholder action: Corporate engagement and shareholder action, sometimes referred to as active ownership, takes a different approach to sustainable finance by focusing on engagement and dialogue with portfolio companies after an initial investment is made to influence corporate behavior and ESG strategies and actions, including through direct corporate engagement (i.e., communicating with senior management and/or boards of companies), filing or co-filing shareholder proposals relating to ESG issues, and proxy voting that is guided by comprehensive ESG guidelines.[14]

      Norm-based screening: Norm-based screening involves screening potential investments against minimum standards of business practice based on international norms relating to climate protection, human rights, working conditions and action plans against corruption such as those issued by the UN, ILO, OECD and NGOs (e.g. Transparency International).

      Negative/exclusionary screening: Negative or exclusionary screening consists of exclusion from a fund or portfolio of certain sectors, companies, countries or other issuers based on activities considered not investable.  Exclusion criteria can include moral values (e.g., product categories such as tobacco, gambling or weapons), standards and norms (e.g., human rights and corruption), ethical convictions (e.g., company practices such animal testing), legal requirements (e.g., controversial armaments such as cluster bombs or land mines, excluded to comply with international conventions) or controversies.  Companies engaged in negative sectors, activities or practices must be prepared to make significant modifications to their business models in order access capital from investors and lenders applying these types of screens.[15]

      Best-in-class/positive screening: Best-in-class (positive) screening contrasts significantly with negative screening and calls for investment and lending decisions to be made based on demonstrated high ESG performance of sectors, companies or projects relative to industry peers.  Investors can rely on a growing number of reference indexes to select projects that can improve both the risk and return aspects of their portfolio and companies need to be mindful of the criteria applied by the reference indexes and track their performance, although such indexes are not infallible and that it remains difficult to reliably measure ESG performance.[16]

      Sustainability themed/thematicinvesting:  Sustainability themed investments include investment activities focused on themes or assets specifically contributing to sustainable solutions—environmental and social (e.g., sustainable agriculture, green buildings, lower carbon tilted portfolio, gender equity, diversity). Thematic investments are increasingly important for certain long-term oriented investors such as pension funds, insurance companies and sovereign wealth funds.[17]

      Impact investing and community investing: Impact investing is aimed directly at creating a positive environmental or social impact by identifying and solving a particular environmental or social problem and has been described as investments made in com­panies, organizations, and funds with the intention of generating social and environmental impact (pursuit of positive externalities) alongside a financial return.  Impact investing requires measuring and reporting against these impacts, demonstrating the intentionality of investor and underlying asset/investee, and demonstrating the investor contribution. Community investing involves specifically directing capital to traditionally underserved individuals or communities, as well as financing that is provided to businesses with a clear social or environmental purpose. Some community investing is impact investing, but community investing is broader and considers other forms of investing and targeted lending activities.[18]

      A difference lens on the landscape of investors interested in providing financing to companies engaged in the pursuit of business models that contribute to sustainable development was offered by BNP Paribas[19]:

      Socially Responsible Investing (SRI):  SRI is the most widely understood approach to sustainable finance and involves integrating ESG criteria, in a systematic and traceable manner, into decisions on financial management and investment and encouraging asset managers to consider extra-financial criteria when selecting asset values.

      Green Finance:  Often viewed as a subset of SRI, green finance includes all transactions that are addressed toward energy transition and combatting climate change.  Green finance is often executed by the issuance of green bonds and the growing popularity of those instruments has led to global investors to take steps toward standardizing terms to make the capital raising process more efficient.  Asset managers may also contribute by decarbonizing their portfolios to limit their ecological footprint.

      Social Impact Investing:  Social impact investing, or social finance, includes investments into projects that have a social focus and seek to address a particular social or environmental challenge.  Sometimes referred to as solidarity-based finance, investments in this area typically target unemployment, housing problems caused by increased poverty, environmental issues such as organic farming or clean energy and development of third world economies.[20]

      Social Business:  Social businesses were described by BNP Paribas as being primarily social in nature but following viable economic models—in other words, a shared value concept that seeks both profit and social impact.  With the consent of investors, profits are reinvested to combat exclusion, protect the environment or promote development and solidarity.  Forms of social business include microfinance, impact investing and Social Impact Bonds (i.e., bonds that are repaid upon maturation only if the social objectives of the project have been achieved).

      The Market for Sustainable Investment

      The financial services industry has taken notice of importance of sustainable finance and the market for sustainable investment opportunities has been growing steadily as more and more industry participants are recognizing the long-term benefits of a more sustainable economy and incorporating sustainability considerations into their strategies and operations.  According to data from the GSIA, global investment in sustainable assets (assets under management, or AUM) stood at USD 30 trillion in 2022.[21]  That number reflected a material change in the methodology used in the US to determine sustainable investment AUM that reduced the amount from USD 17 trillion reported for the US in 2020 to USD 8.4 trillion.[22]  Inclusion of the US data would result in a global decline in investment activity of 14% from 2020; however, in non-US markets (Europe, Canada, Japan, Australia and New Zealand), sustainable investment AUM increased by 20% to USD21.9 trillion since 2020.  The absolute value of sustainable investing assets grew across most regions (Europe, Australia and New Zealand and Japan), a reflection of broader market growth.  The proportion of sustainable investing relative to total AUM grew in Australia and New Zealand and Japan; however, that metric declined in Europe from 42% to 38%, perhaps reflecting increased regulatory requirements and a subsequent move to more conservative fund labelling and reporting, all part of list of actions included in the EU’s Sustainable Finance Action Plan.[23]

      Globally, the largest sustainable investment strategy was corporate engagement and shareholder action (USD 8.06 trillion), followed by ESG integration (USD 5.59 trillion), an interesting evolution from 2018 when negative/exclusionary screen was the most popular through 2020 when ESG integration was the most popular.  The GSIA cautioned that changes in reporting methodology made comparison across reporting periods problematic, but pointed out that the emergence of engagement and activism in the data was in line with the experience of practitioners who indicated that investors are increasingly focused on engagement with the aim of influencing change both within the companies they own and in the real economy.  The top three sustainable investment strategies (corporate engagement and shareholder activism, ESG integration and negative/exclusionary screening) consistently accounted for over 80% of the assets across each region, however there are differences in the preference for each strategy across regions and it was notable to see the shift in the US away from ESG integration (15%) towards corporate engagement and shareholder action (62%).[24]

      Another perspective on the growth, status and prospect of sustainable finance was provided by the 2024 World Investment Report released by the UN Conference on Trade and Development (UNCTAD) which declared that while the sustainable finance market, as measured by the value of sustainable bonds and funds, increased by 20% to more than USD 7 trillion in 2023, there were signs of a slowdown as most of the increase was driven by cumulative issuance and rising valuations.[25]  The sustainable bond market showed only marginal growth—new issuances climbed 3% to USD 872 billion, bringing the outstanding value of the market to more than  USD 4 trillion (green bonds were the main driver of growth, while issuance in other segments, especially social bonds, fell).  The market value of the sustainable fund market increased 7% to USD 3 trillion; however, funds clearly were fending off strong headwinds as net inflows dropped from USD 161 billion in 2022 to USD 63 billion in 2023.[26]  According to the report, greenwashing was the most significant challenge to the sustainable fund market, a situation that required more attention to well-defined product standards, robust sustainability disclosures, external auditing and third-party ratings.  The report also noted that while most funds have adopted and published strategies to address climate change, only one in three have aggressively moved to reorient their portfolios by divesting from fossil fuels and reinvesting the proceeds in renewables.[27]

      Consistent with its leadership in other areas of sustainability and corporate social responsibility, Europe continued to have the largest pool of sustainable investment assets globally as of 2022 and commentators have noted that sustainable investing has been broadly adopted in Europe and has reached the highest level of maturity compared to any other region.  The GSIA found that sustainable investing grew in Europe from USD 12 trillion in 2020 to USD 14 trillion in 2022 but that this growth failed to keep pace with broader market growth.  Specifically, the GSIA noted that the percentage of assets defined as sustainable in Europe has been declining, by around 5% each year, and speculated that this trend could be attributed to increasing regulatory requirements regarding disclosures and a shift to a more risk averse reporting approach as part of an overall picture of increasing maturity of sustainable investing definitions and approaches as the industry develops.[28]

      The US trails slightly behind Europe.  The US SIF Foundation (USSIF) estimated that sustainable investment AUM held by institutional investors, money managers and community investment institutions in the US who use one or more strategies of ESG incorporation (and provide information on the specific ESG criteria incorporated in investment decision-making and portfolio construction) and/or file or co-file shareholder resolutions as publicly traded companies on ESG issues was USD 8.4 trillion in 2022, representing 12.6% of the USD 66.6 trillion in total US assets under professional management.[29]  To address concerns that investors were claiming to deploy ESG integration strategies but failing to provide adequate disclosure on specifics, USSIF modified its methodology for its 2022 report and excluded the AUM of investors who stated that they practice firmwide ESG integration but did not provide information on any specific ESG criteria they used.  Notably, this change, which was consistent with the regulatory initiatives discussed below to improve ESG-related disclosures and marketing practices, resulted in the sustainable investment AUM (USD 8.4 trillion) being much lower than the 2020 estimate of USD $17.1 trillion. 

      The leading ESG criteria for US money managers in 2022 were climate change/carbon, military/weapons, tobacco, fossil fuel divestment, and anti-corruption; the leading ESG criteria for US institutional investors in 2022 were climate change/carbon, conflict risk (terrorist or repressive regimes), board issues (i.e., directors’ independence, diversity, pay and responsiveness to shareholders), sustainable natural resources/agriculture, and tobacco; and the leading ESG issues raised in shareholder proposals, based on the number of proposals filed with the US Securities and Exchange Commission (SEC) from 2020 through 2022, were ensuring fair workplace practices (i.e., ending de facto discrimination based on ethnicity and sex), disclosure and management of corporate political spending and lobbying, and climate change (i.e., assessment of climate risk and disclosure and efficacy of efforts to reduce greenhouse gas emissions).  While not yet among the leading categories mentioned above, both money managers and institutional investors in the US showed increased interest in social issues such as human rights, equal employment opportunity/diversity, and health and safety, likely a response to the challenges of the Covid-19 pandemic that had arisen during the period for which data was collected.[30]

      US financial institutions have lagged behind their counterparts in the EU and other parts of the world on sustainability issues; however, increasing awareness and concerns about sustainability, including among younger generations, have contributed to increasing levels of sustainable and responsible investing; an increased focus from the largest US banks and other financial institutions on sustainability risks, lending practices and related opportunities; development and evolution of sustainability risk frameworks by US insurance companies and related regulators; expanding adoption of federal and state policies around transition to low carbon energy; and financial innovation in many sectors alongside social innovation and cultural development.[31]  However, widening resistance to sustainable investment strategies in financial markets in the US, as well as to sustainability and disclosure requirements, has created a significant challenge for sustainable finance in the US.  For example, UNCTAD found that as of 2023 17 states had passed legislation prohibiting fund managers from considering ESG factors in their investment decisions or prohibiting states from contracting with asset managers that exclude certain industries, such as fossil fuels, from their portfolios.[32]

      Data indicates that Asia is progressively catching up and that sustainable investing is gaining more traction in Asian countries outside of Japan, which was one of the

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