Performance of Sustainable Investments

The financial performance of sustainable investments has been a topic of much debate. A common misconception is that sustainable investments yield lower returns than traditional investments. However, recent studies and data suggest otherwise.

Financial Performance Comparison

Research conducted on the performance of nearly 11,000 mutual funds from 2004 to 2018 shows that there is no financial trade-off in the returns of sustainable funds compared to traditional funds. Sustainable funds have provided returns in line with comparable traditional funds while demonstrating lower downside risk. During periods of extreme volatility, sustainable funds have shown to be more stable.¹

The belief that sustainable investing requires a financial trade-off is widespread, yet it contradicts the growing body of evidence. Sustainable funds have often matched or even outperformed their traditional counterparts over multiple time horizons. For instance, over a 10-year period, the average annual return for a sustainable fund invested in large global companies has been 6.9% a year, compared to 6.3% a year for traditionally invested funds.²

Sustainable Investing and Market Performance

Sustainable investments are not only about ethical choices but also about financial prudence. Companies with robust ESG practices tend to have improved operating performance, which can positively impact stock prices. This aligns with the notion that companies that manage their environmental, social, and governance issues effectively are likely to be more resilient and financially successful in the long run.³

A common question among investors is whether sustainable investments can match the financial performance of traditional investments. A comprehensive study by Morningstar found that sustainable funds, which consider environmental, social, and governance (ESG) factors, have performed on par with, or better than, traditional funds. The study analyzed thousands of mutual funds and ETFs and found that the returns of sustainable funds were comparable to those of traditional funds over various time periods. Moreover, sustainable funds often experienced lower volatility, suggesting that they may offer a smoother investment ride, particularly in turbulent markets.

Money continues to flow into ESG assets, with the big contributors being Europe and the US. Global ESG assets under management (AUM) surpassed the $30 trillion mark in 2022⁴ (up from $18 trillion in 2021⁵). If the trend continues, global ESG AUM will hit $40 trillion in 2030, representing more than 25% of all AUM.

Dispelling Misconceptions

The misconception that investors must sacrifice returns when opting for sustainable investments is persistent but unfounded. Data from numerous studies, including those conducted by investment firms and independent researchers, indicate that sustainable funds have frequently outperformed their traditional counterparts. For example, during market downturns, such as the one experienced in early 2020, many sustainable funds outperformed the broader market, thanks to their focus on companies with strong ESG practices. This outperformance can be attributed to the fact that companies with robust ESG profiles are often better managed, more forward-thinking, and more resilient to shocks.⁶

Summary

The link between sustainable investing and market performance is becoming increasingly clear. Companies that score high on ESG metrics tend to have stronger financials and are better positioned to navigate the challenges of the modern business environment. These companies are often leaders in their industries, innovating and operating efficiently, which can lead to superior financial performance. As a result, sustainable investments are attracting a growing share of capital, reflecting a broader recognition of their potential to deliver competitive returns while also addressing critical societal challenges.

References

1. Morgan Stanley Institute for Sustainable Investing (2019). Sustainable Reality – Analyzing Risk and Returns of Sustainable Funds. https://www.morganstanley.com/content/dam/msdotcom/ideas/sustainable-investing-offers-financial-performance-lowered-risk/Sustainable_Reality_Analyzing_Risk_and_Returns_of_Sustainable_Funds.pdf ↩︎
2. Collinson, P. (2020, June 13). Ethical investments are outperforming traditional funds. The Guardian. https://www.theguardian.com/money/2020/jun/13/ethical-investments-are-outperforming-traditional-funds ↩︎
3. Brown, A. (2015, March 29). Sustainable investments mostly match or beat traditional investments. IR Magazine. https://www.irmagazine.com/esg/sustainable-investments-mostly-match-or-beat-traditional-investments ↩︎
4. Catsaros, O. (2024, January 8). Global ESG assets predicted to hit $40 trillion by 2030, despite challenging environment, forecasts Bloomberg Intelligence. Bloomberg. https://www.bloomberg.com/company/press/global-esg-assets-predicted-to-hit-40-trillion-by-2030-despite-challenging-environment-forecasts-bloomberg-intelligence/#:~:text=London%2C%208%20January%202024%20%E2%80%93%20Global,from%20Bloomberg%20Intelligence%20(BI). ↩︎
5. Stanton, R. (2022, October 10). ESG-focused institutional investment seen soaring 84% to US$33.9 trillion in 2026, making up 21.5% of assets under management: PwC report. PwC. https://www.pwc.com/gx/en/news-room/press-releases/2022/awm-revolution-2022-report.html ↩︎
6. Capotă, L et al. (2022, November) Are ethical and green investment funds more resilient? European Central Bank. https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2747~1b6db3db8d.en.pdf ↩︎