The evidence continues to challenge the misconception that ethical and responsible investing comes at the expense of financial returns. Recent research backs up previous studies concluding that you can make money and make a difference.
The 2020 Benchmark Report from the Responsible Investment Association Australasia (RIAA) shows yet again that ethical investments, on average, provide returns in-line with, or better than, mainstream funds over most time frames.
RIAA assessed the performance of responsible investment funds against the performance of mainstream funds over one-, three-, five- and ten-year time horizons, shown in Figure 35. The leading practice responsible investment Australian share funds surveyed outperformed mainstream Australian share fund benchmarks for all periods. Responsibly invested international share funds outperformed the Morningstar average mainstream international share fund over each time horizon except the one-year time period. The leading practice responsible investment Multi-sector funds surveyed outperformed mainstream Australian share fund benchmarks for all periods.
In their new Ethical Investment Guide, the Australasian Ethical Adviser Co-Op references Simon O’Connor, CEO of RIAA. The Guide notes that “Simon has good news for those of us seeking to make money and change the world, by using our money to support the good and starve the bad”: “The evidence is incredibly strong. Investors no longer need to sacrifice returns to do the right thing. That old myth is dead and buried.”
In an article titled “Ethical investments are outperforming traditional funds” The Guardian (13 June 2020) reported on a recent study by Morningstar research examining the long-term performance of a sample of 745 Europe-based sustainable funds with Environmental, Social and Governance (ESG) strategies showing that the majority of strategies have done better than non-ESG funds over one, three, five and 10 years ending December 2019. Morningstar noted that “Average returns and success rates for sustainable funds suggest that there is no performance trade-off associated with sustainable funds. In fact, a majority of sustainable funds have outperformed their traditional peers over multiple time horizons.” Over 10 years, the average annual return for a sustainable fund invested in large global companies has been 6.9% a year, while a traditionally invested fund has made 6.3% a year. The Morningstar research also showed that sustainable funds held up better than their traditional counterparts during the first quarter 2020 COVID-19 sell-off, delivering superior returns in all but one category.
“The findings debunk the myth that there is a performance penalty associated with ESG investing,” said Hortense Bioy, director of sustainability research at Morningstar. “ESG factors are not just ‘nice to have’ but drivers of outperformance,” said Jan Erik Saugestad, chief executive of Storebrand Asset Management. “It is both right and smart to exclude certain business practices in violation with well recognised conventions or with inherent high risk and negative impact.”
Morningstar USA research shows that over the past 1, 3 and 5 years, ESG fund strategies lost less money than non-ESG funds during market declines and displayed less volatility. Morningstar conclude that “Increasingly, it is becoming evident that the companies that manage their ESG risks well perform better. It is a win-win situation, from the point of view of outperformance and ethical practices.”
The Guardian article concludes with campaigners welcoming the confirmation that sustainable funds are better. Michael Kind of ShareAction – a charity and company that promotes responsible investment – says: “It’s very positive, but also not surprising, to see that funds with robust environmental, social and governance (ESG) strategies are overall better performers financially. We hear from savers very often that one of the biggest barriers to action is that there is a perception that you will lose out financially if you switch to investing responsibly. But is this enough? No … we would expect more ambitious and authentic ESG funds to deliver better outcomes for stakeholders and the environment but not inevitably to deliver investors more money every time.”