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Does investing sustainably mean sacrificing returns?

17 days ago

DOES INVESTING SUSTAINABLY 
MEAN SACRIFICING RETURNS?

In the past, there has been a common perception that investing sustainably, or in other words, investing in companies contributing to a sustainable future means sacrificing returns. But research has shown that this isn’t necessarily the case and, in fact, in certain market conditions, sustainable investments have been more likely to outperform the wider markets.

A recent Morningstar study looked at the performance of 745 ‘sustainable funds’ from European asset managers, focusing on a variety of asset classes and geographical areas. Sustainable funds like these tend to use environmental, social and governance (ESG) criteria when choosing investments, pursue a sustainability-related theme or aim to make a measurable positive impact alongside their financial returns.

Good performance over the last decade
The results showed that around 6 out of 10 of these sustainable funds delivered higher returns than their equivalent conventional funds over multiple time periods – the 1, 3, 5 and 10 years leading up to the end of 2019. Outperformance varied between different regions and over different timescales, but the numbers suggest that investors who picked ESG funds generally fared better.

Of course, past performance doesn’t guarantee future performance, and just as with regular funds there are a huge variety of different sustainable funds focusing on many different aspects of sustainability. So picking a sustainable investment doesn’t guarantee good performance, but the figures might provide comfort to investors who would like to invest sustainably while also seeing their money grow.

Resilience during market downturns 
Perhaps more importantly, during these uncertain times, research also shows that sustainable funds have historically shown greater resilience than their broader market peers during market downturns. No clearer was this trend than in the first quarter of 2020 when the global stock market lost more than 20% of its value as Covid-19 became a pandemic. Morningstar reported that 51 of their 57 global sustainable indices fell by less than their broader counterparts over the period, and at MSCI, 15 of 17 indices did the same.

This outperformance was partly due to sustainable funds’ tendency to have low exposure to traditional energy companies, meaning they were less affected by the spectacular crash of the oil price. But this is only a small piece of the puzzle.

Quality with lower volatility 
Many companies with high ESG ratings also tend to be less volatile and score highly for quality, with strong management and fewer operational risks. Strong inflows also supported sustainable funds during the first quarter. Over the three months, global ESG funds brought in more than $45 billion of new assets, compared to outflows of $384 billion for the overall fund universe. While this was positive for the asset class, it also suggests that sustainability is rising higher on many investors’ agendas, just as we have seen it become a more important issue in the public eye.

Beware of greenwashing 
Previously a niche area, sustainable investing has now entered the mainstream. More than $1 trillion is now invested in sustainable funds, and 125 new sustainable funds were launched in the second quarter of 2020 alone.

With this increased popularity, it’s important for investors to look out for an emerging trend – greenwashing. This is when an asset manager or company claims to be taking action on sustainable or ESG issues, perhaps to attract new investors or improve public relations, but in reality is doing very little.

This is why it can be beneficial to entrust an investment manager, with a robust and consistent process of due diligence, to analyse and choose your sustainable investments.

What we’re doing at Architas 
At Architas, we are committed to a sustainable future, and we believe in the power that investments can play in this transformation. In 2018 we became a signatory of the United Nations’ Principles for Responsible Investment, and since then we have been working hard to integrate ESG analysis as part of our investment process.

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