It may be time to finally put to rest the debate over whether sustainable investing is “mainstream.” A remarkable 85 percent of U.S. individual investors now express interest in sustainable investing strategies, according to a new study from the financial services firm Morgan Stanley.
The third edition of the individual investor survey, Sustainable Signals, examines the attitudes, perceptions and behaviors of individual investors towards sustainable investing. This year’s study showed investor enthusiasm at an all-time high. That includes 95 percent of millennials who now express interest in sustainable investing, a generational trend closely followed in TriplePundit’s ongoing coverage.
These investors are putting words to action. About half of the general population (52 percent) and 67 percent of millennials are taking part in at least one sustainable investing activity, such as investing in companies or funds that target specific environmental or social outcomes.
Matching investments to impact
Morgan Stanley’s study underscores the growing popularity of impact investing, as 3p has reported, in which investors want products that match their interests. Some 84 percent of all investors surveyed, and 90 percent of millennials, want the ability to tailor their investments to their impact goals and they want to track the impact return on the investment in an impact report.
Individual investors’ embrace of sustainable investing is in lockstep with the 90 percent of institutional investors globally who believe ESG integrated portfolios are likely to perform as well or better than non-ESG integrated portfolios. An increasing number of banks also have their eyes on the $23 trillion global market for sustainable investing.
In the U.S., sustainable investing assets reached $12 trillion in 2018, according to the US SIF: The Forum for Sustainable and Responsible Investment. That’s one in four dollars in total assets under professional management in the U.S.
Debunking the myth of a financial trade-off
Individual investors’ conviction about sustainable investing outweighs concerns that there might be a financial trade-off: 86 percent believe that corporate environmental, social and governance (ESG) practices can potentially lead to higher profitability and may be better long-term investments, the Sustainable Signals study found.
In fact, there is growing evidence that investors don’t have to make a financial trade off. In August another study by Morgan Stanley showed that sustainable funds provide both financial performance and lowered risk. The returns of sustainable funds are no different, says Morgan Stanley Institute for Sustainable Investing, while offering investors comparatively lower downside risk—as well as impact on a broad range of environmental, social and governance issues.
“The myth that sustainable investing requires a financial tradeoff has been surprisingly sticky, despite research demonstrating that companies with strong social or environmental practices outperform their peers on a variety of measures,” Matthew Slovik, Head of Global Sustainable Finance at Morgan Stanley said in a press release. “By looking at thousands of mutual funds across multiple asset classes, we found that sustainable investments can help investors meet a variety of financial objectives for generating returns and managing risk.”
In its white paper, “Sustainable Reality: Analyzing Risk and Returns of Sustainable Funds,” Morgan Stanley analyzed 10,723 funds, using Morningstar data on exchange traded and open-ended mutual funds active in any given year from 2004-2018. The key findings:
- There is no financial tradeoff in the returns of sustainable funds and traditional funds. No consistent or statistically significant difference in total returns existed between ESG-focused and traditional mutual funds and ETFs.
- Sustainable funds may offer lower market risk. Sustainable funds experienced a 20 percent smaller downside deviation than traditional funds, a consistent and statistically significant finding.
Steady in turbulent winds
The study also found that in years of turbulent markets, such as 2008, 2009, 2015 and 2018, sustainable funds' downside deviation was significantly smaller than traditional funds.
Looking specifically at the last quarter of 2018, when U.S. stock market volatility spiked, the study found that, despite negative returns for nearly all funds, the median sustainable fund outperformed the median traditional fund by 1.39 percent in U.S. equity returns.
“While the last quarter of 2018 may have caused angst among many investors, those with investments in sustainable funds likely saw smoother fluctuations and potentially fewer losses,” said Slovik.
For the 53 percent of investors—including 59 percent of millennial investors—who believe that investing sustainably requires a financial tradeoff, according to Morgan Stanley, this news should send the current wave of enthusiasm for sustainable investing soaring even higher.
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