Morgan Stanley
  • Wealth Management
  • Dec 4, 2017

Why Sustainable Companies Can Outperform

Investing in companies with environmental and socially conscious business practices has the potential to make a difference—and earn profits.

Despite what many people think about large companies, I believe that big institutions actually have unique potential to create change—and that we can influence the directions those institutions take.

Over the last 25 years, I’ve seen this firsthand.  Throughout the course of my career, I have worked for The Wall Street Journal, the White House, and for the last decade at Morgan Stanley. Working inside these venerable institutions, I’ve come to appreciate what large wakes they can leave and how they can help us meet the challenges and needs we can’t solve as individuals.

As the global population increases to 9.7 billion in 20501 and the strain on available food, water, and energy resources grows exponentially, I believe that the nearly $300 trillion worth of stocks, bonds and other investments in the marketplace can be one of the most powerful forces for positive social change to meet those needs.2

Most people think of the financial markets like the ocean—a vast, impersonal force of nature. But nearly one-third of that ocean is owned by individuals. Most of the rest is owned by the institutions that derive their power, authority and capital from us as consumers. If we’re the ultimate owners of the capital markets, why can’t we make some waves? 

Do you ever choose fair trade coffee? Order the sustainably farmed trout when you secretly crave the scarce Chilean sea bass? Drive a hybrid or electric car? In all those cases,  you’re taking a personal action that you believe can add up on a global scale. Why do so many people think a $4 cup of Fair Trade coffee matters but choosing how to invest $4,000 in a retirement account doesn’t?

What is sustainable investing?

Sustainable investing means combining the best tools of traditional investing with insights about the environment, society and good governance. In Morgan Stanley’s latest poll of individual investors, we found that 75% were interested in sustainable investing, and 71% believe companies that focus on the environment and social goals will actually earn better returns. 

But there’s a disconnect. Despite this high level of interest, 53% of people worry that investing in line with their beliefs means earning less. But, increasingly, research is helping prove this assumption untrue. One of the biggest obstacles to investing according to our convictions may actually just be in our heads. 

Sustainable investing doesn’t have to mean lower return potential

There are a few well-known companies out there that started out as small, socially conscious companies and ended up being purchased by corporate giants for hundreds of millions of dollars . . . each. Importantly, to protect the value of the investments they made, the large corporations realized that they had to preserve the socially conscious mission of those brands, or they wouldn’t be as successful.  

Similarly, a leading producer of palm oil in Papua New Guinea recognized the social and environmental impacts of production, so it altered its business model to include a fully traceable supply chain and reduced its use of petrochemicals as a fertilizer. The changes resulted in not only an improved reputation, but profit margins 79% higher than the industry average.3

Sustainably minded companies may actually perform better than average

Harvard Business School did a study: If you invested a dollar 20 years ago in a select portfolio of public companies focused just on growing their businesses , that dollar would’ve grown to $14.46. Not bad. But if you’d instead invested that same dollar in a portfolio of companies that focused on the most important environmental and social issues while growing their businesses, that same dollar would’ve grown to $28.36.4

These companies could earn outsized gains because they focused on things that aided their businesses, like wasting less water and energy, incentivizing their CEOs to focus on the long term and providing high-quality, diverse workplaces that lead to greater employee satisfaction, retention and productivity. 

In one meta-analysis, 88% of studies found that companies that adhered to social or environmental standards showed better operational performance, and 80% of studies showed a positive effect on stock price performance. If that’s not a compelling business case, I don’t know what is.5

The power is in our hands

Sustainable investing isn’t just for billionaires in private equity, or microfinance loans in emerging markets or artisanal bakeries in Brooklyn. It can include the kinds of investment decisions that regular investors are generally making anyway, like buying stocks and bonds in Fortune 500 companies or broadly diversified mutual funds. This is now the fastest-growing sector of the investment industry, reaching $23 trillion globally.6 In the U.S., more than one out of every five dollars under professional management is now invested sustainably.7

And, perhaps most importantly – it’s the future. Sustainable investing is particularly popular among younger investors: 86% of millennials expressed interest in sustainability. Not only that, they truly believe their actions will create positive change—everything from voicing greater support for environmentally friendly packaging to a greater willingness to exit investment positions because of objectionable corporate activity.8

Each of us can be a ripple that joins together in a wave and moves the ocean of capital. I encourage you to think about how you can turn the tide by investing in the change you want to see in the world.

Ready to invest in what matters to you?