Michael Zezas: A Framework for ESG Growth in U.S.

While the demand for Environmental, Social, and Governance investing has been growing primarily in Europe, a potential new regulatory policy may drive new interest and opportunity for U.S. investors.

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Welcome the Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, March 23rd at 10 a.m. in New York.

Taking a break from specific market impacts for the moment, we want to focus on the growth of a new market for investors - the market for ESG investing, which a new regulatory policy may help nudge into the mainstream in the U.S.

As you may already know, ESG stands for Environmental, Social and Governance, three factors that represent a measurement of how socially conscious the investment is. The demand for this style of investing has grown substantially in recent years. For example, per our sustainability research team, there are about 2 trillion dollars of dedicated ESG assets under management globally. But about 85% of that is in Europe, showing how U.S. investors have been relatively slower to adopt such strategies.

Yet earlier this week, the SEC proposed a new rule that could create new incentives for U.S. investors to adopt ESG strategies. This rule would require companies to provide disclosures about their emissions, as well as governance and strategy for dealing with climate related risks. As our sustainability research team noted in a report this week, having a standard for disclosure can help build the ESG market by giving investors a common template for understanding ESG impacts. That differs from the current state of play, where many companies do disclose on climate related issues, but to different levels and by differing standards, making analytical comparisons difficult.

We should note, though, that this is just a first step toward a regulation that could boost the size of the ESG market. Regulatory rules tend to take a long time to finalize and implement. According to Government Accountability Office case studies, it can take anywhere from six months to five years, as proposed rules navigate a series of comment periods, judicial challenges and revisions. So we'll track the process here and report back when there's more to know.

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