Originally published July 28, 2020
If you thought sustainable investing was just a do-gooder approach, it’s time to take another look.
With all that’s changed in 2020 so far, you may not have realized that sustainable investing is emerging as a way forward. Sustainable funds are seeing a surge in assets, and some of the world’s largest asset managers see growing opportunities in sustainable investing.
If sustainable investing hasn’t been on your radar, here are four reasons why it’s worth paying attention to it now.
1. Major investment firms see sustainable investing as the future.
I’m a longtime proponent of sustainable investing, but you don’t have to take my word for it. These days, some of the largest investment managers see a bright future for sustainable investing.
“We are on the front end of a profound, long-term structural shift in global investor preferences toward sustainability that is not fully priced into the market today and may therefore drive outperformance during a long transition period,” BlackRock, the world’s largest asset manager, wrote in a May 2020 outlook.
“We do believe a substantial shift is under way: stakeholders are increasingly pricing in sustainability preferences, which should lead to a reconciliation of ‘sustainable’ and ‘financial’ materiality over the long-term,” said J.P. Morgan’s co-heads of ESG & Sustainability said.
Current market conditions also could contribute to a rise in sustainable investing. “A low-growth and low-bond-yield environment should drive the adoption of [sustainable investing] SI philosophies,” UBS wrote.
2. Fund companies are launching sustainable funds at a record pace.
Fund companies are also getting into the sustainable game. Top fund companies like Vanguard and Fidelity now have sustainable or ESG (environmental, social and governance) funds. There are many new funds coming to market every year.
Morningstar reported that 23 new sustainable funds were launched in the first half of 2020 with more to come. “We will likely see a record number of new sustainable fund launches in the U.S. this year. It would mark the sixth year in a row with more than 20 new launches,” Morningstar wrote.
iShares expected to introduce roughly 50 more ESG ETFs in the next two years, Salim Ramji, the global head of iShares, told Barron’s, noting iShares also wants to “make available all traditional market-cap weighted indexes in ESG form.”
Additionally, hundreds of funds have begun adding ESG issues to their investment process. “Nearly 500 funds added ESG criteria to their prospectuses” in 2019, Morningstar found.
3. Sustainable investing is being used to help manage risk in uncertain times.
In a year like 2020, risk management is essential and sustainable investing has long been used as a risk-management tool. Well-managed companies tend to be less likely to suffer a public relations problem, boycotts or labor problems that affect bottomline earnings. An environmental catastrophe can have a devastating impact on a company’s stock value.
“Companies that manage sustainable risks better tend to also manage [other] risks better and tend to be better-managed. From a factor lens, they have a greater quality bent; [they] are more profitable and resilient through periods of turmoil,” Salim Ramji, the global head of iShares, told Barron’s.
A majority of advisors (70%) in Nuveen’s 5th annual responsible investing survey “say superior risk management is the top reason why their high-net-worth clients invest in RI [responsible investments].”
4. Performance has become a top reason to invest sustainably.
Sustainable investing has shown that it can perform well. “Year-to-date, S&P 500 constituents in the top-quintile of social sustainability have outperformed the bottom-quintile social laggards,” CNBC noted.
In the volatile first half of 2020, “an impressive 72% of sustainable equity funds rank in the top halves of their Morningstar Categories and all 26 ESG (environmental, social, and governance) index funds have outperformed their conventional index-fund counterparts,” Morningstar reported.
In Nuveen’s survey, 53% of investors cited better performance as the top reason for investing in sustainable responsible investments.
For years, studies from Morgan Stanley, Nuveen TIAA, Barclays, Deutsche Bank, Oxford University and the United Nations have shown that sustainable investing performs as well, if not better, than conventional investing. (The U.S. Forum for Sustainable and Responsible Investment (USSIF) maintains a list of key studies here.) Now investors are seeing this firsthand.
It’s not too late to get started
Talk with your advisor about how he or she manages sustainable portfolios and how you might add sustainable investing to your portfolio. If you’re working as your own advisor, sustainable funds can be a great starting point. (Full disclosure: My firm manages a sustainable fund.) Funds give you the ability to own a portfolio of sustainably screened stocks for a small minimum investment.