Sustainable investments are no longer the poor relations of investing. You can do good and still earn good returns – potentially even better than the alternative.
It’s a time-honoured axiom of investing that sustainable funds underperform their traditional counterparts. But there’s been a sea change recently, with decades of investing wisdom turned on its head by a flurry of recent studies that found sustainable funds outperformed their non-sustainable cousins.
The data takes some unpicking: one of the key factors in this market is the sheer complexity of the information to hand.
Whatever imperfect measure of sustainability you choose, there’s pretty universal agreement about the outperformance. According to financial services group BNP Paribas, over the last five years a range of sustainable equity indices have outperformed standard non-sustainable benchmark stock indices. It noted that the MSCI World SRI (Socially Responsible Investing) index has seen a 14.1% compound annual growth rate (CAGR) in returns since the beginning of 2016, 1.1% more than the MSCI World standard benchmark. The Euronext Low Carbon 100 index has returned 7.1% CAGR since 2016, ahead of the 6.3% of the STOXX Europe over the same period.
Morningstar, an American financial services firm, analysed the performance of 4,900 funds to find out whether sustainable investments can beat their traditional counterparts over the long term. It found that a majority of surviving sustainable funds – those that existed 10 years ago and still exist today – outperformed their average surviving traditional peer.
Over 10 years, the average annual return for a sustainable investments fund invested in large global companies has been 6.9% a year, while a traditionally invested fund has made 6.3% a year. Over the 10-year period to 2019, 58.8% of surviving sustainable funds across seven categories were considered to have beaten their average surviving traditional peer.
A study from the Morgan Stanley Institute for Sustainable Investing found that sustainable investments funds outperformed traditional funds and reduced investment risk throughout 2020, weathering the volatility of the pandemic year better than their counterparts. According to the report, “sustainable funds’ strong risk and return performance during an exceptionally turbulent year further erodes the persistent misconception that sustainable investing requires a performance sacrifice.” For many investors, the lower volatility and steadier performance of sustainable investments is the attraction.
A complex environment
So why do some investors still think sustainability must be traded for performance? In part, the devil is in the details. What does sustainable mean, after all? How green is a company that produces legs for oil rigs that are also legs for wind turbines? Which measures of sustainability are critical: would you prioritise water or biodiversity? Is it enough to do no harm, or should companies be actively seeking change?
There’s a raft of different areas to consider. Transition and stewardship are important parts of the sustainability debate. It is not about divestment. It’s about using their investor voices to push management to make changes.
Sustainability can’t be divided neatly into good and bad, unfortunately for those who prefer their investments clear cut. There is certainly demand for sustainable investing; UKSIF members report a massive increase in the number of people who want to manage their investments sustainably, even if few of us can define what we mean by it.
We recognise the growing importance of and focus on sustainable strategies with our clients – and ensure that this area is addressed in our Discovery, or Due Diligence process.
We then work to build this element into any funding proposal we pursue – makes a big difference!
Ref: Clare Gascoigne