Sustainable Investing has been practiced in many forms for much of the past 50 years and it continues to gain momentum. Today, the Global Sustainable Investment Alliance reports that the field has grown to more than $30.7 trillion in assets under management.
Despite the long history and burgeoning growth of the field, there are still persistent questions about potential trade-offs between performance and sustainable objectives. However, there is a growing body of research examining this issue. Some of the studies were conducted as part of academic research while other reports were generated by asset managers and practitioners. During the development of our strategies, we reviewed this research and considered these potential objections.
There are a host of issues to examine when reviewing portfolio outcomes. Performance, risk, diversification, governance and non-investment considerations should be evaluated.
Highlights from the Research:
Morningstar reviewed the results of socially conscious funds in their database. In a 2016 article, they found that the majority of these funds scored high on their conventional assessment of fund quality (3-5 Stars out of a possible 5-Star rating). The conclusion of the report stated, “The evidence from the star rating is that socially conscious funds tend to either outperform or perform in line with their conventional peers on a risk-adjusted basis” and that “investors interested in incorporating sustainability into their portfolios can do so without worrying about an intrinsic performance penalty.”
Morgan Stanley conducted research on mutual funds and separately managed accounts in 2015. Their report concluded, “investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments. This is on both an absolute and a risk-adjusted basis, across asset classes and over time…”
Furthermore, in 2017, Nuveen/TIAA Investments (TIAA) evaluated sustainable versus traditional equity indices and posed the question: “Does pursuing social goals – limiting the range of potential investment opportunities – require sacrificing performance?” Their analysis indicated that over the long term no statistical difference was apparent in this comparison which suggested the absence of any systemic performance penalty. Further, they noted that risk measures such as volatility were similar between the study groups.
In 2015, Oxford University and Arabesque Partners produced an analysis of over 200 studies on the relationship between corporate social responsibility (CSR) and financial performance. They found that sustainable practices were a factor in reducing borrowing costs, increasing operational performance, and positively influencing stock prices. They concluded that “based on the economic impact, it is in the best interest of investors and corporate managers to incorporate sustainability considerations into their decision-making processes.”
In addition, there is evidence that incorporating environmental, social, and governance (ESG) issues into the investment process can have a positive effect on bond returns, not just equity returns. Barclays produced a study regarding the impact of ESG on fixed income returns. Their research indicated that incorporating ESG factors into the investment decision resulted in a small but persistent performance advantage and no evidence of a negative effect. They found that companies with a high governance score in their study experienced fewer credit rating downgrades. They also found evidence that bonds with high ESG scores had lower average credit spreads than bonds with lower ESG scores which translates into a perception of lower financial risk.
Sustainable investing extends beyond purchasing company securities. Investment managers may serve as activists and parlay their financial influence into lasting corporate change. For example, a proxy is an asset owned by the investor. The manager may apply leverage in support of positive practices through proxy voting, submitting shareholder resolutions or engagement with company management. Sustainable investment funds have promoted change by using these channels to influence corporate behavior. These practices are seen as drivers of long-term value creation by making corporations more accessible and accountable.
Sustainable investing is an established practice with a long history of results. Extensive research has been published which addresses performance and risk measures. The findings suggest that there is no sacrifice of performance inherent in pursuing sustainable investment objectives.
Download Full Article
Global Sustainable Investment Alliance, 2018 Global Sustainable Investment Review.
Hale, J. (2016). You Don’t Have to Sacrifice Returns for Sustainability. Morningstar Direct. Retrieved April 26, 2019 from direct.morningstar.com.
Morgan Stanley Institute for Sustainable Investing (2015). Sustainable Reality: Understanding the Performance of Sustainable Investment Strategies.
Campagna, J., Liao, L., O’Brien, A., Nuveen TIAA Investments (2017). Responsible Investing: Delivering Competitive Performance.
Clark, G., Feiner, A., Viehs, M. (2015). From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance. University of Oxford and Arabesque Partners.
Desclee, A., Dynkin, L., Hyman, J., Polbennikov, S., Barclays (2016), Sustainable Investing and Bond Returns: Research Study into the Impact of ESG on Credit Portfolio Performance.