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Sustainable Investments Outperforming Traditional Investments, Reports Morgan Stanley

A new report from the Morgan Stanley Institute for Sustainable Investing finds that investing in sustainability has usually met and often exceeded the performance of comparable traditional investments, both on an absolute and risk-adjusted basis, across asset classes and over time.

“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.

The Sustainable Reality report includes a review of 10,228 open-end mutual funds and 2,874 separately managed accounts over the last seven years. Highlight findings include:

  • Sustainable equity mutual funds met or exceeded the median return of traditional equity funds for 64% of the time periods examined;
  • Sustainable equity mutual funds also had equal or lower median volatility for 64% of the time periods examined;
  • For the longest time period (seven years trailing, 2008-2014), sustainable equity mutual funds met or exceeded median returns for five out of six different equity classes examined (for example, large-cap growth); and
  • Long-term annual returns of the MSCI KLD 400 Social Index, which comprises firms scoring highly on environmental, social and governance (ESG) criteria, exceeded the S&P 500 by 45 basis points, between its inception in 1990 to the end of 2014.

A survey of individual investors released last month by Morgan Stanley demonstrates why these latest findings are of particular importance for sustainable investing. According to the Sustainable Signals survey, investors appear to place a premium on sustainability yet believe sustainable investments require a financial sacrifice:

  • Nearly three quarters (72%) of those surveyed believe that companies with good ESG (environmental, social and governance) practices can achieve higher profitability and are better long-term investments; but
  • At the same time, 54% believe that sustainable investing involves a financial trade-off.

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“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.”

In other sustainable investment news, last month we saw a trend of prominent banks announcing sustainable investment programs. Citigroup launched a $100-billion commitment to finance climate change mitigation activities, Deutsche Bank committed to investing €1 billion in green bonds, the Bank of England (BoE) published a research agenda acknowledging the impact of climate change on financial markets and last September Barclays also announced it would invest a minimum of £1bn in Green Bonds.

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