Despite a common belief that sustainable investing and the performance of sustainable/responsible (S/R) portfolios is having a negative effect on overall investment performance, new research shows otherwise, according to a Morningstar report.
Titled ‘Sustainable Investing Research Suggest No Performance Penalty’, the report showed that academic research collated could prove to debunk myths that surrounded S/R portfolios and showed S/R funds and indices tended to perform in line with conventional ones.
“We would have additional evidence that there is no performance penalty associated with sustainable funds,” the report said.
“Morningstar has classified such funds as ‘socially conscious’.
The report suggested that while advisers often steer away from sustainability, S/R investing had now proved itself for classification as mainstream, and was popular with younger markets, as well as with female investors.
The report said: “For advisers, planners and retirement plan fiduciaries, one of the biggest obstacles to sustainable investing is the perception that it has a negative effect on investment performance”.
“Women and millennials — consistently indicate they are highly interested in sustainable investing…[it] is rapidly becoming part of the global investment mainstream.”
The paper attributed the rise in popularity of sustainable investing to Morningstar research on global funds from 2002-2016, which not only showed S/R funds and indices were on par with conventional counterparts, but also that a focus on company-level environmental, social, governance (ESG) factors could lead to better risk-adjusted performance within portfolios.
The report also suggested that companies with higher ESG ratings had the opportunity to outperform comparable firms across the stock market and in accounting terms. ‘Modern Portfolio Theory’ was also cited for having showed a limited investment universe could force an investor into a less efficient and low functioning portfolio, which meant a favourable lean toward S/R investments.
The report showed the current distribution of S/R funds had a positive skew, but was clustered toward the middle of the distribution.
