While interest in sustainable investing has grown in recent years, myths regarding the popular strategy abound. The socially and environmentally conscious approach is designed to allow investors to build portfolios that align with their desires to make a positive impact on society and the environment – while also taking into account the risks and returns of conventional investing.
A Deutsche Bank study found that environmental, social and governance (ESG) integration was correlated with stronger risk-adjusted performance. Moreover, a study by Morgan Stanley’s Institute for Sustainable Investing found that 64% of the time, over a seven-year period from 2007 to 2014, sustainable equity mutual funds matched or outperformed traditional funds’ returns.1
According to a CFA Institute survey, sustainable investments may help reduce volatility and risk as investors search for companies with the best long-term outlook. Additionally, “water use, waste management, employee practices and governance can actually have a material effect on financials,” said Audrey Choi, CEO of Morgan Stanley’s Institute for Sustainable Investing, in an October interview with Bloomberg. Finally, as the population increases in a world with limited resources, more emphasis is being placed on the need for efficiency in food, water and energy use and production.
From attracting and retaining better human capital to sourcing resources using sustainable means, several factors help companies that operate in a sustainable manner to potentially provide better investment performance. Plus, there is a growing belief that companies that ignore ESG factors may become vulnerable to increased regulation or be required to pay punitive fines. Aside from encouraging positive practices, sustainable investing can help align your investments with your personal values and may improve portfolio risk-return characteristics.
Impact investing is only one type of sustainable investing, existing toward the more philanthropic and less returns-focused end of the spectrum. Sustainable investing is an overarching analysis-based approach for investing in companies that have sustainable business practices that may help them out-perform over time. Even if you are philanthropic, you may be drawn to sustainable investing’s potential to reduce volatility, contribute to long-term returns and ensure your investments aren’t contradicting your values.
Just as with traditional investing, sustainable investing requires due diligence. Your advisor can research and vet sustainable investment options – just as they would any other – ensuring that your portfolio stays true to your comprehensive financial strategy and personal interests and goals.
Just as not all sustainable investing is impact investing, a variety of sustainable investment approaches are available, and each has a different focus or goal. Exclusionary screening and ESG integration are the most commonly used, and each strategy is explained in the Sustainable Investing Explained brochure. Beyond approach, there are several variations of investment processes: Some consider ESG factors of the utmost importance while others value performance first and ESG criteria second. Depending on which interests matter to you most, a number of options are available to help align your values and goals, so you can feel good about your financial future as well as the investments that may help you improve it.
1Returns and volatility were compared on both a calendar year (2007 – 2014) and trailing basis (3, 5 and 7 year). 1 year trailing data was excluded, since it was the same as the 2014 calendar year data. 10 year data could not be fairly assessed and was excluded due to a low number of sustainable funds in existence at the time.
2CFA Institute, “ESG Issues in Investing: Investors Debunk the Myths.” 2015
There is no assurance that any investment strategy will be successful. Investing involves risks including the possible loss of capital. Past performance may not be indicative of future results. The returns mentioned do not include fees or charges which would reduce an investor’s returns. Risk-adjusted return refines an investment’s return by measuring how much risk is involved in producing that return, which is generally expressed as a number or rating. Raymond James is not affiliated with Deutsche Bank or the Morgan Stanley Institute for Sustainable Investing.