Back in June of 2020, I shared my early experience with sustainable investing, dating back to 1995. We called it SRI for Socially Responsible Investing, with the concept of trying to do well by doing good with your investment dollars. Back then, my conversations with advisors were about how much return they were willing to sacrifice in order to align a client’s desire for a more purposeful investment approach with SRI/ESG investments.
By June of last year, however, and for the first time in my 30+ year career, ESG investing had gone mainstream. There were models being developed that were not all ESG, but in which ESG was being utilized as a replacement for low cost beta strategies in order to seek to improve returns. This evolution in the world of investing has been particularly notable in the past 10 months.
Along with so many others in the financial industry, I’ve come to understand that sustainable investing can be more than just doing good for the environment ― and it’s not just for a handful investors. Sustainable investing uncovers Environment, Social, and Governance (ESG)-related risks and opportunities that would have otherwise been overlooked by traditional financial analysis. By looking at these risks and opportunities, ESG provides additional insights into a company and may offer competitive risk-adjusted returns.
I believe sustainable investing provides a new, more comprehensive standard for investing that can potentially provide better outcomes for investors over the long-term. And it’s not just me. I’ve seen a similar shift in the industry as more and more advisors are embracing sustainable solutions, and not just because of a social or environmental preference, but for pure investment purposes.
In my conversations with advisors, I see four main reasons driving this shift.
One of the main critiques of sustainable investing that I’ve heard is that you sacrifice performance. You limit investing, the argument goes, in companies that may not be doing things you personally like but can offer good returns to help meet your investing goals.
It turns out, however, that sustainable investing may not come at the expense of investment performance. Companies that exhibit positive ESG characteristics also tend to be high quality firms, with strong balance sheets, relatively less debt, more stability, and strong corporate governance. Such companies may help position portfolios for the future, something that is particularly important when investing for the long term. It also helps underscore how they may potentially be more resilient during market downturns. As Figure 1 illustrates, sustainable indexes have outperformed their parent benchmarks during a series of market downturns in recent years. To be sure, this is no guarantee of future performance, and represents just a few events in recent years. But it demonstrates that in recent history, at least, sustainable has kept pace with traditional investing approaches.
Percentage of sustainable indexes that have outperformed during downturns
Source: BlackRock. As of December 2020. This is a set of 32 globally-representative, widely analyzed sustainable indices and their non-sustainable counterparts. Indices are used for illustrative purposes only and are not intended to be indicative of any fund’s performance. It is not possible to invest directly in an index. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
Originally Posted on April 29, 2021 – Sustainable Goes Mainstream
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1Morningstar, Are Your Clients ESG Investors?, April 22, 2019, based on a nationally representative sample of 948 respondents.
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