Brief Thoughts on the Current State of the Impact Space

Despite a period of challenging market conditions, weaker performance in 2022 and recent headlines decrying impact investing, we believe impact investing continues to demonstrate its resilience and long-term value and investors continue to show their commitment. While flows into U.S. sustainable funds dropped to $3.1 billion in 2022, their lowest level in seven years, U.S. funds in general saw outflows of $370 billion, the first calendar year of outflows since at least 1993. 1  The number of sustainable funds available to U.S. investors also rose to 598, up 12% from 2021.2 Despite increased politicization of material impact-related risks and opportunities and broader criticism from traditional segments of the investment industry, investors showed a continued appetite for impact investing.

This demonstrated investor demand is despite 2022 being an atypical year of below-average performance for sustainable funds. In stark contrast to recent years, most sustainable funds landed in the bottom half of their respective Morningstar categories. However, one year does not undo a larger trend. Over the trailing three- and five-year periods, a “sustainability-agnostic” investor would have been better off choosing the typical sustainable fund over their traditional counterparts.3 Given the longer-term track record, it is important to consider the broader context of any given fund’s or group of funds’ performance. We have recently experienced a period of volatile market conditions with markedly different impacts on different sectors, and many sustainable funds are likely to be both comparatively overweight to large-cap tech stocks and underweight to sectors like energy, potentially causing short-term discrepancies in results despite what we believe are long-term advantages. As we continue to work through this challenging market environment, we believe that the risks and opportunities we and other investors have identified by incorporating environmental, social and governance (ESG) and broader impact considerations are as relevant as at any time and the long-term results will bear that out.

Regulatory Changes Can Ultimately Benefit Investors

Amid pressure from investors looking for greater transparency and moves by regulatory bodies in the U.S. and European Union, greenwashing concerns have remained center stage. The U.S. Securities and Exchange Commission (SEC) has proposed multiple new rules which would require more stringent disclosures from companies around climate risk4 and require funds that make ESG claims to provide more detailed disclosures based on the type of impact claimed. For example, climate and environmental funds would be required to disclose greenhouse gas (GHG) emissions associated with their holdings, impact funds would be required to describe the specific impacts they seek to achieve and their progress, and funds that use shareholder engagement strategies would have to disclose their voting records and practices.5 In the EU, the European Securities and Markets Authority published their Sustainable Finance Roadmap 2022-2024, aimed in part at assessing and addressing greenwashing risks and creating benchmarks to help meet sustainability and impact goals.6

As these regulatory shifts have occurred, industry groups have responded to the need for more rigorous and consistent information. For example, for its most recent annual trends report in 2022, the Forum for Sustainable and Responsible Investment (US SIF) requested more granular information from institutions on the incorporation of ESG considerations. This change in calculation methodology led to a remarkable drop in total estimated assets in the space, from $17.1 trillion in their previous report in 20207 down to $8.4 trillion in their 2022 report.8 Similarly, some funds preemptively removed their ESG, sustainable or impact labels in anticipation of stricter regulatory standards, and Morningstar made changes to its Morningstar Sustainable Attributes framework, which resulted in 19 funds being removed from Morningstar’s most recent reporting in 2022 after being included in 2021.9

We continue to believe that the increased regulation and stronger reporting requirements are ultimately beneficial for investors and for our industry broadly. Investor confidence and the ability to achieve impact goals require access to additional material information and thorough, accurate and consistent reporting that allows for informed choices by investors.

Identifying Risks and Opportunities

Impact investing continues to provide an opportunity to find compelling investment opportunities and help mitigate risk posed by poor ESG practices.

The Cost of Climate Change

Aside from the existential human concerns, climate change also comes at an extreme financial cost. Recent research indicates that insufficient action on climate change could cost the U.S. economy alone $14.5 trillion in the next 50 years. Over that same period, nearly 900,000 jobs could disappear each year due to climate change.10 But the investment required to combat climate change can bring new, well-paying jobs across the country. In just the first six months of the Inflation Reduction Act (IRA) being in place, it helped create more than 100,000 jobs in 31 states.11

Laggards Run Risks

The green transition presents significant opportunities for companies that adapt quickly, but those that lag behind run the risk of dwindling market share and stranded assets. Recent research indicates that, depending on the policy scenario, the global net present value of stranded assets in the fossil fuel industry is an estimated $21.5 trillion to $30.6 trillion.12 If companies and investors were to shift their focus, they stand to take advantage of significant opportunity. Wind and solar accounted for nearly 70% of the energy capacity added in 2022. Twenty-two states and the District of Columbia have committed to a shift to 100% renewable energy by between 2040 and 2050, requiring a massive investment and putting companies who can offer renewable solutions at a significant advantage.13

Brand Value

Consumers favor more sustainable companies and products. In recent studies, 69% of consumers said sustainability has become more important to them over the past two years. The same research showed that 35% of consumers want to purchase more sustainable products but cite limited availability as a barrier.14 Companies that respond to such demand can both avoid reputational risk and capture greater market share.

Diversity Pays Dividends

We have seen through numerous research studies that companies with better diversity, equity and inclusion (DEI) records have better performance. Diverse teams tend to perform better, likely attributable to a wider range of perspectives offering a better view of risks and opportunities. And this shows in the bottom line. As just one example, companies that rank in the top 25% of their industry for executive team gender diversity have annual revenue growth roughly two percentage points higher than those in the bottom quartile and profit margins three percentage points higher.15

Investment Stewardship

We believe that active ownership and investment stewardship – voting proxies and shareholder engagement – are central to impact investing and present an important avenue for our clients to help achieve their impact goals. As prevailing public opinion and actions by some legislators diverge, investors – individuals and fund managers alike — find themselves uniquely positioned to ensure that a vocal minority cannot dominate a conversation with such important financial implications.

According to recent research, more than three-quarters of consumers reported that they are more likely to buy from a company that stands up for ESG considerations, and 76% of consumers said they would stop doing business with companies that treat employees, communities and the environment poorly.16 And this support appears across the political spectrum, despite the growing politicization of the issue. Recent research shows that, once learning about the process of ESG investing, 70% of registered Republicans and 57% of registered Democrats oppose government interference in ESG investments.17

At the same time, recent backlash against ESG from some corners has applied pressure on companies and asset managers. As just one example, legislation passed in Texas in 2021 that prevents state pension funds from investing in companies that have divested from oil and gas companies has already led to over $500 million being removed from BlackRock by the Teacher Retirement System of Texas.18 This legislation, and others like it in other states, also tamp down competition for borrowing, leading to increased cost, born by the taxpayers, for municipal bonds needed to fund critical infrastructure and services. It is estimated that, in the first eight months of the Texas law being in place, it cost Texas cities an additional $302 million to $532 million in interest on bonds.19 Estimates show that if similar legislation were passed in other states considering it – Kentucky, Florida, Louisiana, Oklahoma, West Virginia, and Missouri — additional costs could be as much as $708 million per year.20 Shareholder voices are a critical tool to push back against these efforts and remind companies, asset managers and legislators alike that the backlash against ESG not only does not represent the majority public sentiment, it could also be detrimental to bottom-line financial performance for companies and taxpayers.

As annual meeting season continues, we look forward to sharing more with you in our Shareholder Resolution Impact Report later this year. 

We remain committed to our belief in the value of impact investing and encourage you to find out more about our impact offering and programs in our 2022 Annual Impact Report.



1 Morningstar. “U.S. Sustainable Funds Landscape Report.” February 21, 2023.
2 ibid
3 ibid
4 U.S. Securities and Exchange Commission. “Press Release: SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors. March 21, 2022.
5 U.S. Securities and Exchange Commission. “SEC Proposes to Enhance Disclosures by Certain Investment Advisers and Investment Companies About ESG Investment Practices.” May 25, 2022.
6 European Securities and Markets Authority. “Sustainable Finance.” Accessed April 26, 2023.
7 US SIF. “2020 Report on US Sustainable and Impact Investing Trends.” December 2020.
8 US SIF. “2022 Report on US Sustainable Investing Trends.” December 2022.
9 Morningstar. “U.S. Sustainable Funds Landscape Report.” February 21, 2023.
10 Deloitte. “Inaction on Climate Change Could Cost the US Economy $14.5 Trillion by 2070.” January 25, 2022.
11 World Economic Forum. “Here’s how the Inflation Reduction Act is impacting green job creation.” March 14, 2023.
12 Climate Change Economics. “An Economy-Wide Framework for Assessing the Stranded Assets of Energy Production Sector Under Climate Policies.” July 28, 2022.
13 Deloitte. “2023 renewable energy industry outlook.” Accessed April 27, 2023.
14 Nielsen IQ. “The changing climate of sustainability has reached a critical moment.” November 30, 2022.
15 Bain and Company. “Do ESG Efforts Create Value?” April 17, 2023.
16 PWC. “How much does the public care about ESG?” June, 2021.
17 Forbes. “What’s Behind The ESG Investment Backlash.” January 29, 2023.
18 Dallas Morning News. “Texas’ teacher pension fund shed $500M in BlackRock investments over fossil fuel law.” March 10, 2023.
19 Knowledge at Wharton. “Texas Fought Against ESG. Here’s What It Cost.” July 12, 2022.
20 Ceres. “New Research Shows Legislation to Boycott ESG May Cost State Taxpayers up to $700 Million in Excess Payments.” January 12, 2023.