Words vs Actions: The parallels between the US election and sustainable finance estimates

The unrealistic predictions we’re seeing across politics and finance risk setting us up for failure, argues Simon Smiles

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US Presidential election polls typically showed Democratic Presidential candidate Joe Biden with a huge lead, an expected increase in the Democrats House of Representatives majority, and a realistic potential for a ‘Blue Wave’ with a Senate majority also being achieved.

Investor polls have also suggested huge sustainable investment interest, demand, and current size.

The Global Sustainable Investment Alliance estimated that sustainable investing assets stood at over $30.7trn at the start of 2018, a 34% increase since 2016. HSBC's Investor Survey published in April 2019, suggests 94% of investors and 93% of issuers now regard environmental and social issues as important, and that only 8% of investors rarely or never factor environmental, social and governance considerations. And a Morgan Stanley survey suggested sustainable investing adoption increased from 70% in 2017 to 80% in 2019, with a further 15% of respondents actively considering sustainable investing adoption. 

The PRI's Listed Equity Strategies report claims more than 50% of signatories would consider divestment where engagement has been unsuccessful. However, as the report also highlighted, divestment is actually a very unusual outcome of engagement – occurring in only 3% of signatory responses.

But in reality, while strong, support for both US Democrats and sustainable investing this year has been much lower than surveys suggested. 

More than 73 million US votes were cast for President-elect Biden's opponent, the second highest for any US Presidential candidate in history. A mere 3% of these voters believe President-elect Joe Biden won the 2020 election, while 73% think the incumbent was the victor, according to a recent CNBC/Change Research poll. And Republicans look highly likely to have retained their Senate majority, while the Democrat's majority in the House of Representatives has shrunk. 

This bias in polls and surveys seems to be even more extreme for sustainable investment. Despite survey results, the vast majority of investment funds are simply not (yet) sustainable. 

A theory for why polls have proved so inaccurate at the recent US election is that the kind of people who answer polls are systematically different from the kind of people who refuse to answer polls – and that this has recently begun biasing the polls in a systematic way. This bias is perhaps even less surprising in sustainable investing surveys than US political polls, given the vast majority of these surveys are run by, and answered by, dedicated sustainable investment professionals. 

Sustainable investing surveys seem to markedly overestimate the current size of sustainable investment 

While the Global Sustainable Investment Alliance survey estimated that sustainable investing assets stood at over $30.7trn at the start of 2018, very different numbers have been reported in reality. In August 2020, Morningstar confirmed assets under management in both passive and active funds that abide by ESG principles surpassed $1trn for the first time on record. 

Meanwhile, the Global Impact Investing Network estimates that impact investing has gone from a niche discipline just a few years ago to a $715bn market. Yet the world's 25 largest private equity firms have raised ‘only’ $795.8bn collectively in the last five years. The vast majority of these top 25 firms are in the US, which lags the EU regarding surveyed sustainable and impact investing preference and adoption. And $303.7bn of these raisings come from the top five firms, of which only two have even launched impact investing funds, collectively raising less than $7bn of committed (but not yet fully invested) assets. 

Sustainable investment surveys also often contradict themselves 

The Principles for Responsible Investment's Listed Equity Strategies report published in October claims that more than 50% of all signatories would apparently consider divestment where engagement has been unsuccessful. However, as the report also highlighted, divestment is actually a very unusual outcome of engagement – occurring in only 3% of signatory responses. 

The World Bank Group's recent Growing Impact report states impact investing in private markets could be as large as $2.1trn in assets under management; but it also suggests that only a quarter of that, $505bn, is clearly measured for its impact – despite impact measurement being a core component of Impact Investments. 

And while HSBC's 2019 Investor Survey found nearly 90% of respondents had environmental and/or social impact strategies, a 2020 KPMG survey found 47% of respondents believed their organisation's attitude to ESG data was "sceptical," while a further 9% responded "overwhelmed."

Cause for (pragmatic) optimism 

For Democrats in the US, in the recent elections they retained their House of Representatives majority. There are two Senate seat elections in January in Georgia, and should Democrats win both the Senate will be split. And President elect Biden, who spent more than 40 years in the Senate, is arguably uniquely suited to the challenge of creating meaningful outcomes with former colleagues of both parties. 

For sustainable investors, financials are increasingly expanding their commitment and focus on sustainable investing. The world's largest investment manager, BlackRock, and world's largest wealth manager, UBS, have both publicly committed to, and are actively supporting, sustainable investing as a core offering. Blackstone, the world's largest private equity firm, has announced plans to cut carbon emissions of companies or assets that it buys by 15% within three years of acquiring them. And MSCI and Sustainanalytics, the two largest providers of ESG data, both now have over 1,000 employees focused in this area. 

But to avoid unrealistic ambitions and almost guaranteed consequent failures, it is best to approach both the current US political and sustainable investment situations with pragmatic, rather than reckless, optimism. This means acknowledging the whole situation in reality, rather than focusing on overly optimistic surveys, polls or headlines. 

Simon Smiles retired from UBS earlier this year after more than 15 years. Most recently, he was Group Managing Director and CIO for Ultra High Net Worth Clients, establishing and running the wealth management sustainable and impact investing teams.