Responsible Investing Does Not Have to Mean Sacrificing Returns

Over the years, there has been a widespread view that choosing to invest sustainably meant forfeiting greater returns. However, recent research has shown that this is not necessarily the case.

As detailed in our previous article, ESG (environmental, social and governance) investment choices can be approached from several angles but tend to focus on funds that have a specific, measurable and positive benefit to society or the environment. As the general population increasingly looks to ‘do their bit’ for the planet, investors are coming to realise that investing in companies with green credentials can also provide positive returns.

A recent Morningstar study looked at the performance of 745 ‘sustainable funds’ from European asset managers – this is what they found.

Good long-term performance

Results show that, over the last decade, 60% of the funds delivered higher returns than their equivalent conventional funds over multiple time periods leading up to the end of 2019. Performance varied by regions and timescales, but figures show that investors who chose ESG funds generally fared better.

As we reiterate regularly to our clients, past performance is not a guide to future performance and thus, investing sustainably, or in any type of fund for that matter, does not guarantee returns. However, the recent data may go some way to reassuring investors who are yet to take the sustainability ‘plunge’ that their money could potentially grow at the same time as contributing to a sustainable cause.

Performance During Downturns

As the pandemic continues to cause global market uncertainty, investors are watching closely to see how it affects their investment portfolios. Encouragingly, the study showed that, historically, sustainable funds displayed greater resilience to market downturns than their broader market peers.

This could be attributed to their lower exposure to traditional energy companies, meaning they were less affected by the large oil price crash. This resilience was particularly evident during the first quarter of 2020 when the global stock market lost more than 20% of its value, and Morningstar reported that 51 out of the 57 global sustainable indices fell by less than their broader counterparts.

Less Volatile and High in Quality

Many companies with high ESG ratings tend to be less volatile, display strong management, have fewer operational risks, and score high for quality. In the first quarter of 2020, global ESG inflows topped $45 billion, compared to $384 billion of outflows for the overall fund cosmos. As well as being positive for the asset class, it also suggests that sustainability is climbing the investment criteria list.

Greenwashing

As with anything in life, there is a risk that things are not always as they seem. Greenwashing is the process of conveying a false impression or providing misleading information about how a company’s products are more environmentally sound than they actually are (Source: Investopedia). As ESG investing becomes more popular, investors must also increase their due diligence to ensure their money is invested in a fund that aligns with their preferred credentials.

If you would like more advice on adding ESG funds to your portfolio, please contact your Finura adviser.

Articles on this website are offered only for general information and educational purposes. They are not offered as, and do not constitute, financial advice. You should not act or rely on any information contained in this website without first seeking advice from a professional.

Past performance is not a guide to future performance and may not be repeated. Capital is at risk; investments and the income from them can fall as well as rise and investors may not get back the amounts originally invested.

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Sources: https://www.morningstar.com/en-uk/lp/European-Sustainable-Funds-Performance
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