The Biggest Myth of Sustainable Investing

 

By Janet Brown

Many people like the idea of sustainable or impact investing, but they have a common misconception that performance can suffer. This notion has been repeatedly debunked.

A 2015 review of over 2,000 academic studies since the 1970s found that the majority of studies show positive findings between environmental, social and governance (ESG) factors and corporate financial performance.

In 2012 RBC Asset Management2 reviewed four bodies of research on sustainable investing and concluded that socially responsible investing has not resulted in lower investment returns.

You don’t have to rely on surveys and studies, however. You can also look at real world results by comparing the performance of a sustainable stock index, like the MSCI KLD 400 Social index, which measures the performance of stocks with high environmental, social and governance ratings, and a conventional stock index like the S&P 500.

Since 1990, when the KLD started, it has performed slightly better than the S&P 500, as shown in the below graph.

This chart illustrates the performance of a hypothetical $10,000 investment made in the MSCI KLD 400 index versus the S&P 500 from 6/30/90-6/30/17. The chart assumes reinvestment of dividends and capital gains, but does not reflect the effect of any applicable sales charge or redemption fees. This chart does not imply future performance. It is not possible to invest directly in an index. Past performance does not guarantee future results

 

Sustainable investing has evolved. Have you kept up?

Given all these studies and the actual track record of sustainable investing indexes like the KLD, why do people continue to believe that sustainable investing can hurt their returns?

One reason is that investors don’t realize how much sustainable investing has changed. They still think that sustainable investing either divests from certain industries, which could limit their opportunity to make money, or it only invests in clean energy, which could add volatility. But sustainable investing is no longer limited to divestment or clean energy.

Today, sustainable strategies are more comprehensive and inclusive. They don’t just exclude companies, they also seek to include companies that have good ESG characteristics. Rather than divesting from companies that don’t make the cut on an ESG level, some asset managers will invest in these companies with the goal of improving them. These managers use their power as shareholders to engage with a company’s management team in an attempt to help the company become a better corporate citizen and a better long-term investment. This approach has had a number of successes.

Sustainability is now mainstream. Some of the largest and most successful companies are working to address the world’s environmental, social and governance (ESG) challenges. This year, 82% of the companies in the S&P 500 will publish sustainability reports compared to just 20% in 2011. That’s a huge improvement in just six years.

Mutual fund managers that don’t market themselves as sustainable or socially responsible funds are also now integrating ESG criteria into their stock selection.

An increasing number of investors are recognizing the benefits of sustainable investing, and these days investors have many new investment choices that are designed to help them try to build wealth and a better world.

Janet Brown is the President and CEO of FundX Investment Group. She manages fund portfolios for high-net worth clients and foundations. She also manages a sustainable mutual fund. Janet is a board member of several non-profits and foundations and a longtime advocate for sustainable, responsible impact investing (SRI). 

Image credit: Pixabay / AhmadArdity

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