Will investing sustainably affect my investment returns?
As climate change increasingly starts to affect us more, investors are asking more questions about the sustainable nature of their investments.
Are the invested companies treating employees fairly, reducing emissions and paying fair wages throughout the supply chain?
As scrutiny increases on sustainable investments and the concept of 'greenwashing', the importance of funds being truly ethical has never been greater.
Ethical investments & performance
As the number of environmental challenges we face continues to rise, investors are asking more questions about the impact their investments are having on the environment. Asset managers are responding to ethical concerns as this once ‘niche’ area is now at the forefront of many investor's minds, with corporate core values now factor for many to determine whether a fund is a suitable investment or not.
Sustainability is now vital to most business strategies and those making changes sooner are reaping the financial benefits of responsible practices. Investors looking for value are increasingly assessing companies willingness to combine their ethical, environmental and social values with their economic needs, more so as it is widely believed to improve risk-adjusted returns.
Enhanced reporting and access to data make it easier for investors to make informed decisions. Funds with environmental, social and governance (ESG) and socially responsible investing (SRI) scores can now simplify evaluating if your personal values can match your investment goals.
ESG investments include:
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Environmental - pollution, climatic influences and the use of natural resources.
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Social - workforce, labour concerns and security of data.
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Governance - corporate issues, the quality and ethical stance of the board and the effectiveness their beliefs have on the organisation they run.
Whatever your reason for investing sustainably, the three principal factors to consider are:
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Integration - Integrating environmental, social and corporate governance considerations into your investment portfolio to reduce your risk and hopefully, improve returns.
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Exclusion – Excluding industries or companies from your portfolio that might not align your values such as tobacco companies, weapons producers or creators of heavy emissions.
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Impact - Investing to generate a positive environmental and social impact, along with financial returns.
This innovative and exciting area of investment is still gathering momentum, however, the real impact of including ESG investments is still difficult to assess. Sustainable indices have a relatively short history when one of the first, the Domini 400 Social Index (now the MSCI KLD 400 Social Index), launched as recently as May 1990.
Historical data is difficult to collate as not all companies acknowledged the importance of sustainability in the 1990's. Since then, the growing importance of this sector has led to other indices being established, including the The Dow Jones Sustainability Index and FTSE4Good launched in 2001 and 1999.
Will I lose out investing ethically?
Ultimately, the question all investors ask is if returns are sacrificed for investing ethically? On the contrary. This ‘niche’ sector is now mainstream and despite historical data lacking quality, back-tested research from over 2000 independent studies shows that returns at least matched or outperformed their traditional investment counterparts.
Furthermore, researched funds with higher ESG characteristics were deemed more robust during times of uncertainty, also highlighting that those with the lowest ESG scores are 10% to 15% more volatile than those with the highest scores.**
ESG focused firms may also offer more longevity for investors as we near the end of economic cycles, and with improved cash management, healthier balance sheets, limited reputational risk and higher levels of transparency also providing some equity stabilising during market downturns.
The image below compares two S&P 500 ETF's over five years. One is non-ESG (blue) and the other is ESG (orange) with the performance figures boxed in red**. In addition to the ESG ETF outperforming the non-ESG, the volatility has also been far lower and providing comfort for investors in volatile times.
From oil producers to fund managers, corporate philosophy is definitely shifting as the financial and social risks of not taking ESG responsibilities seriously are too great. Ranges of ESG screened and SRI ETF’s have ongoing charges as low as 0.07% making the proposition even more attractive, and with the sector now being priced realistically after a recent rally, the time to review your investments should be now.
If you would like to learn more about low-cost, ESG investing and take part in this exciting area of investment, get in touch today and we’ll help you invest in a sustainable future.
**Past performance is not a reliable guarantee of futures returns and should your funds experience volatility, you could get back less than you invested .