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March 30, 2015
No Financial Sacrifice in Sustainable Investing
    by Robert Kropp

The Morgan Stanley Institute for Sustainable Investing analyzes thousands of sustainable mutual funds and separately managed accounts, and finds that most meet or exceed the performance of traditional investments.


According to a recent survey by the Morgan Stanley Institute for Sustainable Investing, 54% of individual investors persist in believing that to choose to invest in sustainable requires a trade-off in financial returns.

But a new analysis from the Institute, entitled Sustainable Reality, helps put to rest the concerns of individual investors that such a trade-off is inevitable. According to the report, “Investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments.” Also, “Benchmark performance of the MSCI KLD 400 Social Index, which includes firms meeting high Environmental, Social and Governance (ESG) standards, has outperformed the S&P 500 on an annualized basis by 45 basis points since its inception.”

“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,” Institute CEO Audrey Choi said. “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.”

Citing decades of academic research, the report refers to a analysis of 190 studies conducted by Oxford University in 2011, which found the following:
1. 90% showed that sound sustainability standards lowered the cost of capital;
2. 80% showed a positive relationship between stock performance and good sustainability practices; and
3. 88% indicated that operational performance of firms was improved by robust Environmental, Social and Governance practices.

Comparing two investment benchmarks—the MSCI KLD 400 Social Index and the S&P 500—the Institute reports that the the sustainable benchmark outperformed the traditional by 45 basis points since its inception in 1990, with an annualized return of 10.14%. Furthermore, industry sector exclusions such as alcohol, gambling, tobacco, weapons, and adult entertainment did not impact performance negatively.

Analyzing equity mutual fund performance, the report found that “sustainable funds met or exceeded median returns of traditional funds for 64% (42/66) of the periods examined. They also met or fell below median volatility of traditional funds for 64% (42/66) of the periods examined.”

Sustainable separately managed accounts also performed favorably compared to their peer group; also, “sustainable fixed income fund performance was relatively inline with traditional funds.”

“Investing to create a positive impact does not necessarily require making a trade-off in investment performance,” the report concludes. “On the contrary, sustainable investments often exhibit favorable return and risk characteristics compared to their traditional peers.”

“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,” Institute CEO Choi observed. “Our review addresses the investment performance concern head-on, and the findings are very positive.”

 

 
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