Sustainable Investments Does Not Compromise Returns
Investment solutions providing the possibility for investors to impact society in a positive way are becoming increasingly popular. The best-known example for such a solution is the so-called sustainable mutual funds. According to Morningstar, a recognized global investment-research firm, mutual funds and exchange-traded funds with a focus on sustainability have attracted new assets at a record pace in 2019. Specifically, estimated net flows into these funds that are available to U.S. investors, totalled $20.6 billion for the year. That is nearly four times the previous annual record for net flows set in 2018.[1] With growing investor interest in sustainable investments, especially among younger investors, this trend might accelerate even more in the years to come.
Amid this trend, one of the key questions surrounding sustainable investing has long been whether investors must be willing to compromise returns, when investing in companies with strong ESG practices. This particular issue will be the focal point of this article.
Research points to better performance
In recent years, there has been several studies examining the contribution of ESG-factors to corporate performance. One of the most comprehensive and exhaustive meta studies conducted on this topic so far is the 2015 paper entitled ‘ESG and Financial Performance: Aggregated Evidence from More than 2000 Empirical Studies’ by Friede, Busch and Bassen (2015).[2] This study reviews about 2200 empirical papers and reports a positive link between ESG-factors and corporate financial performance (CFP). Roughly 90% of the studies reviewed find a non-negative ESG–CFP relation. More importantly, the large majority of studies reports positive findings.
The following chart provides compelling evidence that is consistent with the research findings. The graph shows the performance of one of the most commonly applied sustainable indices, MSCI ACWI ESG Leaders Index, compared with its parent index, the MSCI ACWI.
From its 2007 inception through February 2020, the MSCI ACWI ESG Leaders has in fact outperformed its parent index, MSCI ACWI, by 14 percentage points. This research suggests that investors do not have to compromise returns in order to invest sustainably; on the contrary, it suggests that investing sustainably can improve long term portfolio returns, by quite a bit.
CBS Sustainable Investment Club believe in sustainable investing
At CBS Sustainable Investment Club, we believe in the benefits of sustainable investing. We believe that incorporating material environmental, social and governmental (ESG) information in investment practices leads to better informed investment decisions and as a result better long-term performance. To this end, we at CBS Sustainable Investment Club aim to deliver knowledge and expertise about sustainable financial solutions to the CBS student body and to broaden the understanding of how sustainability is integrated into financial services, markets and the general economy.
Sources:
[1] https://www.morningstar.com/articles/961765/sustainable-fund-flows-in-2019-smash-previous-records
[2] Friede, G., Busch, T., and Bassen, A. 2015. "ESG and financial performance: Aggregated evidence from more than 2000 empirical studies." Journal of Sustainable Finance & Investment.
Disclaimer:
Investing involves risks. This material is not intended to be relied upon as an investment advice, and is not a recommendation to buy or sell any securities or to adopt any investment strategy. Each investor shall make his/her own investment appraisal.
This post may contain “forward-looking” information such as, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. And remember, past performance is no guarantee of future results.