Why all the focus on sustainable investing? Surely any savvy investor or responsible money manager would prioritize share price and earnings over anything else. After all, that’s the way it always has been, right? Unfortunately for the old dogs who can’t learn new tricks—and fortunately for all nvestors from beginners to family offices—that logic is being turned on its head. You can profit from sustainable investing.
Sustainable investments can outperform traditional investments. Social good AND competitive returns no longer look like an “either-or” proposition.
What happened? Did the soulless organism of the global economy suddenly grow a conscience? Or are we seeing an admirable, but fully human, phenomenon take the investment world by storm?
The idea that some companies are good corporate citizens, and other companies are less so (even being abusive bad actors), isn’t new. As early as the 1700s, colonial Quaker business clubs rejected members with assets tied to the southern slave economy.
In the same century, English Methodist preacher Jon Wesley (left) railed to his congregants and the public about businesses like tanning, which produced hazardous waste chemicals, and encouraged them not to invest their money in such “sinful” enterprises.
These two pre-Revolutionary examples highlight two forms of corporate exploitation that are still with us today—destruction of the environment and unacceptable labor practices. Add to that a lack of corporate governance that can reward short-term profits rather than long-term performance, and the need for a more responsible means for investing was born.
There are three basic components to Sustainable Investing:
- Not investing in companies specifically because they don’t align with your values is known as Socially Responsible Investing (SRI).
- ESG Investing is the yin to the SRI yang: you incorporate ESG metrics that provide insight about how a company is run.
- The third component, Impact Investing, seeks to achieve a measurable outcome alongside a financial return.
Can I really profit from sustainable investing?
A perfectly fair question remains: is sustainable investing profitable?
Actually, this is the wrong question. Successful investing (sustainable or not) still relies on basic fundamentals: buy low/sell high, diversify your portfolio, don’t try to time the market (to name a few). The better question: is substainable investing more or less profitable than traditional investing, which may only look at the bottom line and not the socio-economic impact?
This question is complicated, and you can get different answers depending on where you look. Some companies have poor environmental, social and governance practices yet have amazing runs, while others crash and burn. Of course, some companies with amazing best practices also explode in value while others sputter or fail to launch.
Some funds and portfolios that rate highly for impact or ESG have underperformed. Others have impressed. But that may relate more to the talent and experience of the fund manager, not the sustainability strategy. After all, ESG or not, you have to be able to evaluate investments to assemble a successful fund or portfolio.
So, is there a credible way to measure the performance of ESG funds versus non-ESG funds?
Spoiler Alert: Sustainable Investments Can Outperform Traditional Investments
In fact, there is. Picking two investments out of a hat and comparing them doesn’t tell you much. But you can look at a larger universe of funds to see how sustainable funds perform versus non-sustainable funds.
Over the last five years, sustainable funds have performed well versus their traditional counterparts in up AND down markets. This pattern of outperformance continued in 2019 according to Morningstar. You see, you can profit from sustainable investing.
The big question looming after 2019 was how sustainable investments would perform during a significant market downturn. Results in 2020 have helped answer that question. According to the New York Times, 64% of all actively-managed sustainable funds beat their benchmarks through the beginning of August 2020, compared to 49% of non-sustainable funds.
64% of all actively-managed sustainable funds beat their benchmarks through the beginning of August 2020, compared to 49% of non-sustainable funds.
Again, it all depends on the particular investment or fund. Due diligence is still key. But there are many cases where sustainable investing outperforms traditional investing.
What’s Driving the Surge in Sustainable Investment Value?
Why is sustainable investing all over the headlines? Did something change in the world over the past five years? 2020 offers some clues.
The COVID-19 pandemic may have had a realigning effect on a generation—not only the generation that came of age during the crisis, but also an older generation of wealthy investors. They’ve watched as the traditional way of operating a business and solely focusing on short-term profit targets has helped create the extreme socioeconomic volatility that has defined 2020.
Yes, their moral conscience is stirred, but over and above that, short-sightedness and shareholder primacy can have serious drawbacks. Sustainable investing often focuses on investing for the long haul (for future generations as an example), not solely for short-term gains that can lead to systemic problems. Short-sightedness can be a recipe for disaster.
As a result, money has flocked to sustainable investments. US investors poured $30.7 billion into sustainable mutual funds and ETFs in the first 3 quarters of 2020. Inflows for sustainable investments surpassed the 2019 high-water mark by July, and 2019’s tally bested 2018 by four times over.
This influx of capital has its own effect on the market. It’s not just about a number on a stock ticker. These investment dollars help companies innovate, expand, and remain solvent. These investments aren’t just gaining market share because they are performing—they are performing, in part, because they are sustainable.
Beware of Pushback from the Financial Industry
But not every fund manager or advisor will cop to it. Many wealthy investors interested in sustainable investing are facing pushback from their financial advisors. They’re stuck in old paradigms or don’t want to do the work of putting together new portfolios in new paradigms.
Don’t let a fund manager tell you that sustainable investing “doesn’t work” or is less profitable than traditional investing. The evidence proves otherwise. By raw numbers, the right sustainable fund may now be a better investment than a non-sustainable fund.
At Brighter Investing, We Believe in the Power of Social Enterprise
That’s why we’ve made a legal commitment to people, planet, and profit as a Public Benefit LLC. Unlike most U.S. companies whose fiduciary duty starts and ends with shareholder profit, we’ve committed to operating our company sustainably and responsibly. At Brighter, we believe clients want their investments to generate financial returns and support the values & issues they care about. You can generate competitive returns AND invest sustainably. We’ll show you how.
Reach out and let us know what’s important to you and we can help your investments align with your values.