As the world grapples with the challenges of climate change, environmental degradation, and social inequality, a growing number of investors are turning to sustainable investing as a way to align their financial goals with their values. But is sustainable investing profitable? Can investors really “do well by doing good”? In this article, we’ll explore the relationship between sustainability and profitability, and examine the evidence for and against sustainable investing as a viable investment strategy.
The Rise of Sustainable Investing
Sustainable investing, also known as socially responsible investing (SRI) or environmental, social, and governance (ESG) investing, has been around for decades. However, it’s only in recent years that it has gained mainstream acceptance and popularity. According to a report by the Global Sustainable Investment Alliance, sustainable investing assets under management (AUM) grew from $13.3 trillion in 2012 to $30.7 trillion in 2018, representing a compound annual growth rate (CAGR) of 14%.
This growth can be attributed to a number of factors, including:
- Growing awareness of environmental and social issues, such as climate change, inequality, and human rights abuses
- Increasing recognition of the financial materiality of ESG factors, such as the impact of climate change on supply chains and the bottom line
- Expanding range of sustainable investment products and strategies, including index funds, ETFs, and impact investing vehicles
- Regulatory support, such as the European Union’s Sustainable Finance Disclosure Regulation (SFDR)
Does Sustainable Investing Sacrifice Returns?
One of the most common concerns about sustainable investing is that it requires investors to sacrifice returns in order to achieve their values-based goals. However, the evidence suggests that this is not necessarily the case.
Numerous studies have shown that sustainable investing can be just as profitable as traditional investing, and in some cases, even more so. For example:
- A study by the Harvard Business Review found that companies with high ESG ratings outperformed those with low ESG ratings by 4.8% per year between 1993 and 2010.
- A study by the investment firm, MSCI, found that ESG-focused portfolios outperformed traditional portfolios by 1.2% per year between 2007 and 2017.
- A study by the University of Oxford found that sustainable investing can reduce portfolio risk and increase returns, particularly in the long term.
There are several reasons why sustainable investing may be profitable:
- ESG factors can be material to financial performance: Companies with strong ESG track records may be better equipped to manage risks, capitalize on opportunities, and maintain long-term competitiveness.
- Sustainable investing can reduce portfolio risk: By avoiding companies with high ESG risks, investors can reduce their exposure to potential losses and volatility.
- Sustainable investing can provide access to new investment opportunities: The growing demand for sustainable investing products and strategies has created new opportunities for investors to participate in innovative and impactful investments.
Challenges and Limitations of Sustainable Investing
While the evidence suggests that sustainable investing can be profitable, there are also challenges and limitations to consider:
- Greenwashing and ESG ratings inconsistencies: Some companies may exaggerate or misrepresent their ESG credentials, making it difficult for investors to make informed decisions.
- Lack of standardization and transparency: The sustainable investing industry lacks standardization and transparency, making it challenging for investors to compare products and strategies.
- Higher costs and fees: Sustainable investing products and strategies may be more expensive than traditional options, which can eat into returns.
To overcome these challenges, investors should:
- Conduct thorough research and due diligence: Investors should carefully evaluate the ESG credentials of companies and investment products, and seek out independent verification and certification.
- Seek out transparent and standardized reporting: Investors should look for companies and investment products that provide clear and consistent ESG reporting, using standardized frameworks and metrics.
- Negotiate fees and costs: Investors should be mindful of fees and costs, and negotiate with investment managers and product providers to ensure that they are getting value for money.
Impact Investing: A New Frontier in Sustainable Investing
Impact investing is a type of sustainable investing that seeks to generate both financial returns and positive social or environmental impact. Impact investors aim to create measurable, positive outcomes, such as reducing carbon emissions, improving access to healthcare, or promoting financial inclusion.
Impact investing has grown rapidly in recent years, with assets under management (AUM) increasing from $10 billion in 2010 to over $500 billion in 2020. Impact investing offers a range of benefits, including:
- Alignment with values and goals: Impact investing allows investors to align their financial goals with their values and mission.
- Measurable impact: Impact investing provides a framework for measuring and evaluating social and environmental impact.
- Innovative and scalable solutions: Impact investing can support innovative and scalable solutions to pressing social and environmental challenges.
However, impact investing also presents challenges and limitations, including:
- Higher risk and volatility: Impact investing often involves investing in new and untested markets, technologies, and business models, which can be higher risk and more volatile.
- Lack of standardization and transparency: The impact investing industry lacks standardization and transparency, making it challenging for investors to compare products and strategies.
- Trade-offs between financial returns and impact: Impact investors may need to make trade-offs between financial returns and social or environmental impact, which can be challenging to navigate.
Conclusion
Sustainable investing is a growing and evolving field that offers investors a range of benefits, including the potential for long-term financial returns, reduced portfolio risk, and positive social and environmental impact. While there are challenges and limitations to consider, the evidence suggests that sustainable investing can be a profitable and impactful investment strategy.
As the sustainable investing industry continues to grow and mature, it’s likely that we’ll see new and innovative products and strategies emerge, as well as increased standardization and transparency. For investors who are looking to align their financial goals with their values and mission, sustainable investing is definitely worth considering.
| Year | Sustainable Investing AUM (trillions) |
|---|---|
| 2012 | $13.3 |
| 2018 | $30.7 |
Note: The table above shows the growth of sustainable investing assets under management (AUM) between 2012 and 2018, based on data from the Global Sustainable Investment Alliance.
- Harvard Business Review, “The Impact of Corporate Sustainability on Organizational Processes and Performance” (2016)
- MSCI, “ESG and Financial Performance: Aggregated Evidence from 2007-2017” (2018)
Note: The ordered list above provides references to two studies that have examined the relationship between sustainable investing and financial performance.
What is sustainable investing?
Sustainable investing is an investment approach that considers environmental, social, and governance (ESG) factors in addition to traditional financial metrics. This type of investing aims to generate long-term financial returns while also promoting sustainable development and minimizing harm to the environment and society. Sustainable investing can take many forms, including socially responsible investing, impact investing, and ESG investing.
Sustainable investing is not just about avoiding companies with negative ESG track records, but also about seeking out companies that are leaders in sustainability and have a strong potential for long-term growth. By considering ESG factors, investors can gain a more complete picture of a company’s risks and opportunities, and make more informed investment decisions.
Is sustainable investing profitable?
Research has shown that sustainable investing can be profitable, and that ESG factors can have a positive impact on investment returns. A study by the Harvard Business Review found that companies with high ESG ratings tend to outperform those with low ESG ratings over the long term. Another study by the investment firm, BlackRock, found that sustainable investing can help reduce portfolio risk and increase returns.
However, it’s worth noting that sustainable investing is not a guarantee of profitability, and that investment returns can vary widely depending on a range of factors, including market conditions and the specific investment strategy used. Additionally, some sustainable investment strategies may require a trade-off between financial returns and social or environmental impact.
What are the benefits of sustainable investing?
The benefits of sustainable investing include the potential for long-term financial returns, as well as the opportunity to promote sustainable development and minimize harm to the environment and society. Sustainable investing can also help investors to manage risk and reduce their exposure to companies with negative ESG track records. Additionally, sustainable investing can provide a sense of purpose and fulfillment, as investors are able to align their investments with their values and contribute to a more sustainable future.
Sustainable investing can also help to drive positive change in the world, by encouraging companies to adopt more sustainable practices and by supporting innovative solutions to environmental and social challenges. By investing in companies that are leaders in sustainability, investors can help to create a more sustainable future and promote long-term prosperity.
What are the risks of sustainable investing?
The risks of sustainable investing include the potential for lower financial returns, as well as the risk that ESG factors may not be accurately priced in the market. Additionally, sustainable investing can be complex and require a high degree of expertise, which can make it difficult for individual investors to navigate. There is also a risk that sustainable investment strategies may be subject to “greenwashing,” where companies exaggerate their ESG credentials in order to attract investors.
Another risk of sustainable investing is that it may not be suitable for all investors, particularly those with short-term investment horizons or those who require high levels of liquidity. Sustainable investing often requires a long-term perspective and a willingness to accept lower returns in the short term in order to achieve long-term sustainability goals.
How can I get started with sustainable investing?
To get started with sustainable investing, investors can begin by educating themselves about the different types of sustainable investment strategies and the various ESG factors that are considered. Investors can also consider working with a financial advisor or investment manager who has expertise in sustainable investing. Additionally, investors can look for investment products that are labeled as “sustainable” or “ESG,” such as mutual funds or exchange-traded funds (ETFs).
Investors can also consider using online platforms or tools that provide ESG ratings and research, such as MSCI or Sustainalytics. These platforms can help investors to identify companies with strong ESG track records and to build a portfolio that aligns with their values and sustainability goals.
Can I make a difference through sustainable investing?
Yes, investors can make a difference through sustainable investing. By investing in companies that are leaders in sustainability, investors can help to drive positive change in the world and promote long-term prosperity. Sustainable investing can also help to raise awareness about important environmental and social issues, and to encourage companies to adopt more sustainable practices.
Additionally, sustainable investing can help to mobilize capital towards innovative solutions to environmental and social challenges, such as renewable energy or sustainable agriculture. By investing in these types of solutions, investors can help to create a more sustainable future and promote long-term prosperity.
Is sustainable investing a fad or a long-term trend?
Sustainable investing is a long-term trend that is driven by a growing recognition of the importance of environmental and social factors in investment decisions. As investors become increasingly aware of the risks and opportunities associated with ESG factors, demand for sustainable investment products is likely to continue to grow. Additionally, regulatory bodies and governments are increasingly recognizing the importance of sustainable investing, and are implementing policies and regulations to support its growth.
As the field of sustainable investing continues to evolve, it is likely that we will see new and innovative investment products and strategies emerge. However, the core principles of sustainable investing – considering ESG factors in investment decisions and promoting long-term sustainability – are likely to remain a key part of the investment landscape for years to come.