Sustainable Funds Outperformed Traditional Funds in 2023
One of the most common questions we get asked at Money Matters is ‘can ethical investing and strong financial returns go hand in hand?’. The answer is yes: plenty of evidence shows that ethical investments can do just as well and often better than their traditional counterparts.
A recent example of this is a new report from the Morgan Stanley Institute for Sustainable Investing which shows that sustainable funds outperformed their traditional peers across all major asset classes and regions in 2023. According to the report, sustainable funds generated median returns of 12.6%, almost 50% ahead of the 8.6% returns of traditional funds, with outperformance coming mostly in the first half of the year.
By asset class, sustainable equity funds performed best, with median returns of 16.7% for the full year, outpacing the 14.4% realised by traditional equity funds. Sustainable fixed-income funds saw median returns of 10% in 2023, while traditional fixed-income funds were up 6.4%.
The Institute’s report relied on data sourced from Morningstar, a leading provider of independent investment insights in North America, Europe, Australia, and Asia. Page 2 of the report explains that Morningstar classifies a fund as sustainable if “… in the prospectus or other regulatory filings it is described as focusing on sustainability, impact investing, or environmental, social or governance (ESG) factors. Funds must claim to have a sustainability objective, and/or use binding ESG criteria for their investment selection. Funds that employ only limited exclusions or only consider ESG factors in a non-binding way are not considered to be a sustainable investment product.”
The fund universe for this analysis included closed-end funds, exchange-traded funds and open-end funds, taking the oldest share class, and excludes feeder funds, funds of funds and money market funds. In total, this analysis covered approximately 97,000 funds globally.
Based on the Institute’s analysis of Morningstar data, the report includes the following graph titled ‘Five Year Performance of Sustainable and Traditional Funds’ that we have reproduced in full from page 6 of the report. The figure “shows how median returns have compounded over the past five years (December 2018-December 2023*). If a hypothetical fund achieved the median return for each of the past five years, a sustainable fund would be up +35% compared with a traditional fund’s +25%.” *This is the longest period of comparable history for Morningstar’s Sustainable fund label.
This report shows that ethical investing is absolutely capable of generating robust financial returns, coupled with positive social and environmental outcomes. Advocates of ethical investment cite performance drivers such as attracting, retaining and enhancing the productivity of employees; improving customer sales and loyalty; increasing supplier commitment; contributing to environmental sustainability; and strengthening community and government relations.
If you want to explore how you can invest in a plan and portfolio of independently and expertly chosen sustainable funds, please be in touch with me.
You can read the full report at this link.
The Morgan Stanley article is accompanied by extensive Disclosures that need to be considered, including that this information is for informational purposes only and that past performance is not a guarantee or indicative of future performance. Similarly, this blog is for informational purposes only and past performance is not a guarantee or indicative of future performance.
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