Further Evidence that Sustainable Investing Doesn't Sacrifice Financial Returns
April 2020 Blog Post • By Jennifer Oertel, CMF Impact Investing Expert in Residence
In light of the current worldwide health and economic crisis, which presents us with both challenges and opportunities to explore new ways to maximize and deploy finite resources, it is helpful to revisit one of the impact investing myths that we originally explored: that one has to sacrifice financial returns.
The Morgan Stanley Institute for Sustainable Investing recently issued the findings of a study that compares the performance of sustainable funds (those incorporating environmental, social and governance, or ESG, criteria) to traditional funds from 2004-2018. The study used data available from Morningstar on exchange-traded and open-ended mutual funds, analyzing a total of 10,723 funds for performance on total returns, performance net-of-fees and downside deviation (a measure of risk). The study found that sustainable funds performed similarly to comparable traditional funds, while also reducing downside risk. Emily Thomas, Morgan Stanley Global Investment Management Analysis’s lead sustainable investing analyst, examined performance during volatile markets. Using the last quarter of 2018 as a case study of high volatility, the median sustainable fund outperformed the median traditional fund by 1.39% (significant at the 99th percent level). CMF Impact Investing Committee member John Rogers, an institutional consultant and investing with impact director with Morgan Stanley, highlighted that during this most recent period of volatility, Morningstar has shown that this trend has continued. For the time period beginning in January through March 19, 2020, 70% of sustainable funds ranked in the top half of their respective peer group, and 40% ranked in the top quartile. Read the full report here.
Joel Moore, CPFA, a senior financial and senior portfolio advisor with Merrill Lynch and also a member of CMF’s Impact Investing Committee, provided a report with similar findings from Bank of America Merrill that ESG investing is not just a “bull market luxury” but even more critical in an economic downturn. In the same vein, research reinforces that companies with strong cultures of equality, emphasized and modeled by top management, may have a competitive advantage over their peers. As reported by the Socially Responsible Investing Team of Bank of America Merrill’s Chief Investment Office, McKinsey&Company conducted an analysis of companies, broken down by diversity quartile, to investigate the financial performance of more diverse companies versus their industry peers. While gender diverse companies were more likely to outperform peers, the difference was even more pronounced for ethnically diverse companies.
We have seen a similar trend in fixed income securities. A report released by Barclay’s Investment Bank at the end of 2018 found that bond portfolios comprised of investments with high ESG scores outperformed the index, while those with lower scores underperformed. This seems to be especially true in down economies for funds without exposure to corporate bonds.
These results are consistent with the self-reported performance of impact investments in the 2019 annual investor survey by JP Morgan and the Global Impact Investing Network (GIIN) that includes information from more than 266 organizations collectively managing $239 billion in impact investing assets. Approximately 66% of these investors report targeting risk-adjusted, market-rate returns, 19% sought below market returns that are closer to market rate and the remaining 15% targeted returns closer to capital preservation. (Not surprisingly, foundations and charitable fund managers tend to pursue lower returns than commercial fund managers as part of their programmatic investments.) Investors reported that more than 90% of their investments performed in line with, or exceeded, both their financial and social impact expectations. Of this number, approximately 15% exceeded expectations in both categories.
Want to explore this topic further? Have your own impact investing story to share? Reach out to CMF’s impact investing team.
Jennifer Miller Oertel is CMF's Impact Investing Expert-in-Residence and a shareholder in the law firm of Bodman PLC, where she leads the firm’s Tax-exempt Organizations and Impact Investing Group. With a background in securities law, private equity and mergers & acquisitions, Jennifer utilizes her corporate law and governance skills to assist family and corporate foundations, community foundations, public charities, regional associations, trade and labor associations, chambers of commerce, religious organizations and other tax-exempt organizations as well as impact investors, impact funds, and social enterprises, in all aspects of their business.