5 truths about sustainable investing
Interest in sustainable investing is higher than ever, yet confusion about what it is remains. Does a clear conscience come at the cost of poorer returns? Are sustainable investors mostly Millennials? We highlight 5 key points everyone should know about one of today’s most topical - and exciting - investing sectors.
1. Sustainable investing has historically delivered comparable to conventional investments
Sustainable investing is about considering environmental, social and corporate governance (ESG) criteria when evaluating investments. Many investors now recognize that these factors can materially affect financial performance depending on sector and business model, and evaluating them helps provide a more holistic picture of risks and opportunities. This should support comparable performance to conventional investments – indeed, the MSCI KLD 400 Index, one of the longest-standing "sustainable" indices providing exposure to US companies, has generated similar returns and volatility to the S&P500 over the past 29 years1. Keep in mind that past performance does not guarantee future performance.
2. Sustainable investing is becoming mainstream
Interest in sustainable investing - from both individual and institutional investors - has grown significantly in recent years thanks to increasing recognition of the link between sustainability issues and financial performance. According to Google Trends, worldwide searches for the term have risen 75% since 2014, and the 2018 Global Sustainable Investment Review estimates that sustainable investing assets totaled nearly USD$31 trillion at the start of 2018 – a 34% increase from 2016 levels. An October 2017 report by McKinsey even describes sustainable investing as ‘the new normal'2.
3. Investors have many options for investing sustainably across asset classes
Historically, sustainable investing options largely focused on avoiding unwanted exposures in public equities. Today, investors have a multitude of options that extend beyond just exclusionary strategies and include ESG integration approaches as well as intentional impact investing. The universe of these sustainable investments – which span bonds, equities and alternative investments including private equity, private credit, real estate and infrastructure - supports the construction of well diversified, cross-asset portfolios. At the start of 2018, the majority (51%) of sustainable investing solutions focused on public equities3 while approximately 36% focused on fixed income.
4. More data can help measure the sustainability of investments
The increased availability of environmental and social data from companies themselves as well as third parties, enables better evaluation of performance on sustainability metrics. This allows investors to assess which investments comply with various ESG dimensions, to track their progress over time, and increasingly to prioritize the issues that each individual cares about.
5. Sustainability challenges may represent large scale investment opportunities
The sustainability challenges facing the world today can be daunting, ranging from climate change threats to natural resources strains to insufficient availability and affordability of quality healthcare. The United Nations' Sustainable Development Goals have been embraced by investors as a common framework to identify the most urgent social and environmental issues. Estimates of the capital needed to address these challenges run into the trillions of dollars annually, suggesting significant potential commercial opportunity for solutions that can successfully tackle these issues.