Green area with rows of solar panels

At a glance

Investors are increasingly at the forefront of efforts to address sustainability challenges. More than USD 1tr is already invested in dedicated SI funds. We believe sustainable investing is continuing to build momentum, and now is the right time to incorporate it into portfolios given governments’ commitment to a “green recovery.” Doing so can enhance returns, reduce risk, and contribute to social and environmental goals.

Investors are increasingly directing capital toward projects and companies working toward a more sustainable global economy. Over USD 1 trillion is already invested in dedicated sustainable investment funds, up from USD 600 billion just 18 months ago, according to Morningstar. We believe this will continue to gather momentum and outline three main reasons why it makes sense now for investors to incorporate SI considerations into their portfolios.

1.     The time is now. Sustainable development is a long-term goal, but it has immediate relevance today as investors can benefit from environment- and climate-focused economic recovery packages. The EU has agreed to a fiscal stimulus package worth EUR 1.85 trillion over the next seven years, for example.

2.     Environmental, social, and governance (ESG) topics represent risks and opportunities for investors: Corporate incidents—ranging from wildfire-induced bankruptcy and data privacy to supply chain issues and a global pandemic that exposed unethical business behavior—all have the potential to damage financial performance. Considering the benefits, a focus on sustainability can highlight opportunities in disruptive innovation that could lead to superior returns.

Returns and beyond. Returns in 2020 for sustainable investing strategies at the index, fund, and instrument levels have demonstrated financial performance comparable to or better than conventional equivalents in a volatile market environment. They also aim to deliver a meaningful contribution to, or alignment with, sustainable development goals. 

Sustainable investment opportunities during COVID-19

We see many ways to gain exposure to sustainable investment opportunities:

Diversified sustainable portfolios

Different SI approaches and instruments have varying style, region, or market-cap tilts that drive differences in performance across the economic cycle. This variation makes it possible to build a diversified portfolio of sustainable investments across asset classes. Our Sustainable Investing Strategic Asset Allocations focus on building diversified portfolios using building blocks with explicit SI benefits that can be clearly articulated and demonstrated, with the expectation that it should deliver risk-adjusted returns comparable to those of portfolios with conventional asset allocations.

Replacing traditional with sustainable

Green bonds, on an index level, have exhibited the defensive behavior we expected compared to broad investment grade corporate bond indexes. We continue to expect green bonds to exhibit lower volatility and smaller drawdowns compared to non-green bonds during periods of market stress.

Investing in SDG equity themes

Investors can direct their capital to companies that support the United Nations’ Sustainable Development Goals (SDGs), for example by looking into sustainable longer-term themes such as clean air and carbon reduction, energy efficiency, and renewables.

Greentech

Europe is on the cusp of history's biggest green stimulus program. The EU has agreed to a fiscal stimulus package worth EUR 1.85 trillion over the next seven years. More than 30% will be used for climate investments and “green” economic growth. We expect significant implications for most sectors, especially power generation, transport, industry, and building (heating and cooling). These account for about 80% of European greenhouse gas emissions. Greentech leaders offer multiyear opportunities across many industries. While the European Green Deal is a longer-term plan, we also see attractive investment opportunities in the short to medium term.

Adjust your portfolio to your SI preferences

A core portfolio allocation to the stocks and bonds of ESG leaders can provide defensive characteristics due to the tilt to larger, higher-quality companies. Issue-specific approaches are possible, too. For example, investors concerned about pollution and waste can seek companies with better environment management policies and systems that reduce packaging and recycle more. Our SI methodology covers around 11,000 companies and countries, with over 500 indicators per issuer from multiple leading data providers. Indicators are evaluated on a scale from 1 (worst) to 10 (best) and aggregated into six sustainability topic scores. Alternatively, they can look for companies with sustainable products and services that are contributing to these sustainability issues by investing in the theme of waste management and recycling.

Key investment takeaways:

  • We have seen an increased focus on ESG considerations after COVID-19 from investors and governments, with a reduced tolerance for unsustainable practices.
  • We have made sustainable investing our preferred solution for private clients looking to invest globally.
  • A focus on sustainability can highlight opportunities in disruptive innovation with the potential for superior returns.

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