A growing number of investors are exploring sustainable investing. In 2012, $1 out of every $9 of US assets under professional management was invested in some form of sustainable investment, primarily in public equities. In 2014 that number increased to $1 out of every $6 to a total of $6.57 trillion now invested sustainably. With this growth, investors increasingly ask what tradeoffs, if any, there are to sustainable investing. Some investors believe sustainable investments underperform, or have higher risk than their traditional counterparts. Morgan Stanley set out to explore whether this view is accurate and came to the opposite conclusion!
The study set out to analyze potential performance and risk differences between sustainable and traditional investments. They reviewed a range of studies on sustainable investment performance and examined performance data for 10,228 open-end mutual funds and 2,874 Separately Managed Accounts (SMAs) based in the United States and denominated in US dollars. In the scope of the review, they ultimately found that investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments. This is on both an absolute and a risk-adjusted basis, across asset classes and over time.
More specifically, when investors are deciding whether to pursue a sustainable investing strategy, they should consider the following:
- Sustainable Equity Mutual Funds had equal or higher median returns and equal or lower median volatility for 64% of the periods examined over the last 7 years, compared to their traditional counterparts.
- Sustainable SMAs had equal or higher median returns for 36% of the periods examined and equal or lower median volatility for 72% of the periods examined, over the last 7 years, compared to their traditional counterparts. On a risk-adjusted basis, sustainable SMAs performed closely inline with their traditional counterparts.
- Sustainable Mutual Funds and SMAs had a tighter return and volatility dispersion than their traditional peers
- Individual Firms that actively pursue improvements in environmental, social and governance metrics also tend to have lower costs of capital and higher operational and stock price performance.
A 2011 Harvard study found, that given a $1 investment in 1993 in a value-weighted portfolio of high sustainability versus low sustainability firms, the high sustainability portfolio would have grown to $22.60 by 2010, while the low sustainability portfolio would have only reached $15.40, a difference of over 46%.
Benchmark performance of the MSCI KLD 400 Social Index, which includes firms meeting high Environmental, Social and Governance (ESG) standards, has outperformed the S&P 500 on an annualized basis by 45 basis points since its inception (10.14%, compared to 9.69% for the S&P 500; July 1990 – Dec. 2014). 5 Ultimately, investors should remember that manager selection is crucial; there is a high dispersion of returns and volatility across the spectrum of sustainable and traditional investment strategies alike.
