Morgan Stanley
  • Institute for Sustainable Investing
  • Aug 6, 2019

Sustainable Investing's Competitive Advantages

A new study shows that sustainable funds provide both financial performance and lowered risk, as well as ways to invest responsibly.

Let's say you're in the market for a new toaster. You finally narrow your choices to two models that cost the same and more or less deliver the same even toast, but one of them uses less electricity and has more safety features. Which would you buy?

Seems like a no brainer. But many investors confronted with similarly performing mutual funds still worry that the one with a sustainable investing model might not perform as well. As it turns out, that worry is baseless, according to the latest insights from the Morgan Stanley Institute for Sustainable Investing. The returns of sustainable funds are no different, the Institute finds, while offering investors comparatively lower downside risk—as well as impact on a broad range of environmental, social and governance issues.

“The myth that sustainable investing requires a financial tradeoff has been surprisingly sticky, despite research demonstrating that companies with strong social or environmental practices outperform their peers on a variety of measures,” says Matthew Slovik, Head of Global Sustainable Finance at Morgan Stanley. “By looking at thousands of mutual funds across multiple asset classes, we found that sustainable investments can help investors meet a variety of financial objectives for generating returns and managing risk.”  

In its white paper, “Sustainable Reality: Analyzing Risk and Returns of Sustainable Funds,” Morgan Stanley analyzed 10,723 funds, using Morningstar data on exchange traded and open-ended mutual funds active in any given year from 2004-2018. The key findings:

  • There is no financial tradeoff in the returns of sustainable funds and traditional funds. No consistent or statistically significant difference in total returns existed between ESG-focused and traditional mutual funds and ETFs.

  • Sustainable funds may offer lower market risk. Sustainable funds experienced a 20% smaller downside deviation than traditional funds, a consistent and statistically significant finding.

As for how well sustainable funds do during periods of extreme volatility, the study found that in years of turbulent markets, such as 2008, 2009, 2015 and 2018, sustainable funds' downside deviation was significantly smaller than traditional funds'. The study also looked specifically at the last quarter of 2018, when U.S. stock market volatility spiked, and found that, despite negative returns for nearly all funds, the median sustainable fund outperformed the median traditional fund by 1.39% in U.S. Equity returns, and had a narrower dispersion. “While the last quarter of 2018 may have caused angst among many investors, those with investments in sustainable funds likely saw smoother fluctuations and potentially fewer losses,” said Slovik.

This may all come as a surprise to the 53% of investors—including 59% of Millennial investors—who believe that investing sustainably requires a financial tradeoff. But it seems that incorporating ESG criteria into investment decisions makes good sense financially, as well as from an impact perspective. A 2017 Institute for Sustainable Investing survey of individual investors found that 75% of investors are interested in sustainable investments, while the Forum for Sustainable and Responsible Investments (US SIF) reports that 1-in-4 dollars now invested in U.S. capital markets included sustainability in its approach. The latest findings from Morgan Stanley suggest many opportunities to narrow the gap between investor interest and adoption.


To find out more, get the full report: “Sustainable Reality: Analyzing Risk and Return of Sustainable Funds.” Plus, learn more about Morgan Stanley’s Institute for Sustainable Investing and Investing With Impact, and hear insights on The Power of Sustainable Investing in this Morgan Stanley Minute.

Investors should carefully consider the investment objectives and risks as well as charges and expenses of a mutual fund/exchange-traded fund before investing. To obtain a prospectus, contact your Financial Advisor or visit the fund company’s website. The prospectus contains this and other information about the mutual fund/exchange-traded fund. Read the prospectus carefully before investing.

Sustainable Reality: Analyzing Risk and Returns of Sustainable Funds