Companies that are meticulous about best practices in environmental, social and governance (ESG) areas tend to be meticulous about their businesses in general. Investors can invest with a sustainable lens alongside their existing portfolios to compare and contrast financial returns and hedge against potential governance and reputational risks.
Investors can experience the potential portfolio benefits of sustainability by choosing to run a diversified portfolio, which incorporates sustainability considerations alongside their existing investments. If you are on the fence about completely switching to a sustainable portfolio, this approach may help increase your confidence while aligning your financial goals with sustainability objectives.
Sustainable investing drives capital to companies who manage their environmental, social and governance (ESG) risks and opportunities better than peers, who aim to improve their sustainability performance, or whose products and services improve the environment and society. From what we’ve seen, choosing the best companies for sustainability is good for portfolio results as well.
In fact, during the seesaw of the first half of the year, sustainable investing strategies held up both through downturn and recovery.1 Sustainable investment provided a defense amid uncertainty and volatility around the Covid-19 pandemic in the first quarter of 2020. And during the sharp recovery of the second quarter, sustainable investment funds outperformed their peers2.
“Companies that are doing right by the environment, society and corporate governance usually are doing right on other fundamentals,” says Michael Baldinger, Global Head of Sustainable and Impact Investing at UBS Asset Management. “It isn’t just sustainable equities. Fixed income and thematic indexes also performed strongly in the first half of 2020.”
ESG indexes have largely outperformed their conventional equivalents in the first half of this year3. At the height of the market dislocation and widened risk premiums, green and multilateral development bank bonds provided a defensive strategy in a diversified portfolio4.
Sustainable investing has come a long way from its origins of saying no—excluding from a portfolio those companies engaged in controversial activities such as tobacco or arms. Today, sustainable investing covers a whole universe of asset classes, not just equities but also fixed income and alternatives such as private equity, private credit and real estate. Investors also can find opportunities in longer-term themes, such as population growth and urbanization. They can personalize their portfolios according to their values and even get involved with companies' management to encourage progress.
Engagement is proving to be more influential than exclusion: it puts investors and companies in a two-way dialogue, with the goal of improving transparency and business performance, in terms of ESG issues, strategy, risk management and capital allocation. Engagement can take different forms, from choosing to invest in best-in-class leaders on ESG criteria, to fund managers using proxy votes or taking seats on boards, to individual investors getting involved with the management of the companies they’ve invested in.
“The way to be heard is to have a seat at the table,” Mr. Baldinger says.
Target the issues
“Private capital is huge. In the next 20 years, 460 billionaires will hand down $2.1 trillion to their heirs5,” Mr. Baldinger says. “The United Nations’ Sustainable Development Goals and private-wealth investors generally share the same long-term investment horizon. Sustainable investing is making a real difference. It’s getting capital to important innovations and projects that improve the environment and society.”
The explosion in sustainable investing—to $30.7 trillion at the start of 2018, a 34% increase in two years6—is feeding a virtuous cycle of both companies and investors recognizing the importance of ESG issues and creating even more opportunities for sustainable investment. In fact, the added transparency of responding to ESG criteria can be an extra benefit. Sustainability-related scandals tend to have a financial impact on companies, which sustainable investing aims to filter out.
“Sustainable investing isn’t something where you take a financial hit in order to hold up your values,” Mr. Baldinger says. Investors are increasingly considering sustainability when allocating capital. SI strategies and investment products offer choice across asset classes and geographies. “It’s very mainstream, very diversified, and returns tend to be comparable to traditional portfolios4. As people recognize the importance of ESG factors to the bottom line, sustainable investing is proving to be a smart choice.”