Investment strategies that focus on sustainability don’t have to sacrifice return to also meet their ethical objectives, new research finds.
According to a new report from the Morgan Stanley Institute for Sustainable Investing, the performance of sustainable strategies is comparable to traditional investments, both on an absolute and risk-adjusted basis, across asset classes, and over time.
The report, which is based on a review of over 10,000 open-end mutual funds and 2,874 separately managed accounts over the last seven years, concludes that sustainable equity mutual funds met, or exceeded, the median return of traditional equity funds 64% of the time. Sustainable funds also had equal, or lower, median volatility about two thirds of the time. And, for the seven-year period, 2008-2014, sustainable equity mutual funds met, or exceeded, median returns for five out of six different equity classes (for example, large-cap growth).
The report stresses that, for both sustainable and traditional investing, “manager selection is crucial”; as, it finds that “there is a high dispersion of returns and volatility” across the full universe of strategies.
“Ultimately, our comparison indicates that investing to create a positive impact does not necessarily require making a tradeoff in investment performance; on the contrary, sustainable investments often exhibit favorable return and risk characteristics compared to their traditional peers. We expect that, over time, the fundamental drivers of these performance differences will only grow in importance to investors, both as a way to address important global challenges and to improve investment performance,” the report says.
“We believe sustainable investing will be a key in the mobilization of private capital towards addressing global challenges, but the growth and development of this space remains hampered by a lingering perception that sustainable investments require a financial trade-off. Our review addresses the investment performance concern head-on, and the findings are very positive,” said Audrey Choi, CEO of the Morgan Stanley Institute for Sustainable Investing.
Indeed, the firm notes that a survey of individual investors released last month by Morgan Stanley found that, while investors appear to place a premium on sustainability, they also believe sustainable investments require a financial sacrifice.
“Sustainable investing presents the opportunity for individuals and institutions to align their investments with their values, but there are clearly many investors who have reservations over whether sustainable investing will require them to sacrifice investment performance,” said Choi. “Ultimately, we believe that sustainable investing is simply a smart way to invest, and our review shows preconceptions regarding subpar performance are out of step with reality.”