Many investors believe that sustainable investing requires financial sacrifice, but is this perception based on fact? According to a new Morgan Stanley study comparing the performance of sustainable investments with traditional investments, the answer is no.
Many investors have mixed feelings about whether sustainable investing amounts to quality investing. According to a recent survey from the Morgan Stanley Institute for Sustainable Investing, investors appear to place a premium on sustainability: Nearly three quarters (72%) of those surveyed believe that companies with good environmental, social and governance (ESG) practices can achieve higher profitability and are better long-term investments. At the same time, 54% believe that sustainable investing involved a financial trade-off.
A new study from the Institute for Sustainable Investing sets out to reconcile perception and reality. The study examined performance data from 10,228 open-end mutual funds and 2,874 separately managed accounts over the last seven years and 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.
“For investors considering sustainable investing, the energizing prospect of aligning their investments with their values can be tempered by reservations about whether they may be sacrificing investment performance,” says Audrey Choi, CEO of the Morgan Stanley Institute for Sustainable Investing. “Our new study on sustainable investing performance addresses these concerns head-on, and the findings are positive.”
As one example, sustainable equity mutual funds met or exceeded the median return of traditional equity funds for 64% of the time periods examined. Over the longest time period analyzed, the study finds sustainable equity funds met or exceeded median returns for five out of six different equity classes examined, for example, large-cap growth.
The study also found that long-term annual returns of the MSCI KLD 400 Social Index, which comprises firms scoring highly on environmental, social and governance (ESG) criteria, outperformed the S&P 500, a benchmark of the broader US stock market, by 45 basis points, since its inception in 1990.
“Ultimately, we believe that sustainable investing is simply a smart way to invest, and our review of sustainable investing performance shows that preconceptions regarding subpar investment performance are out of step with reality,” Ms. Choi says.