Sustainable investing makes a lot of financial sense. In fact, a number of financial factors have made sustainable investing very attractive and increasingly popular in the recent decade.
While many companies face challenges related to climate change and the transition to a carbon-neutral economy, sustainable investing helps mitigate long-term portfolio risk and focusing on the opportunities this transition brings (such as the rapid growth in the renewable energy sector or circular economy).
When companies score high on ESG (Environmental, Social, and Corporate Governance – the three central factors in measuring the sustainability and societal impact of an investment) they are likely to treat their stakeholders well, address environmental challenges, boast more conservative balance sheets and steer clear of general controversy. All of these factors make companies with high ESG-scores more resilient during market downturns.
In a number of reports, sustainable funds also show better historical performance. A MorningStar analysis found that a majority of sustainable funds that existed 10 years ago and still exist today, outperformed their average surviving traditional peers. A key factor in the survival and success of the fund was low fees.
Another MorningStar analysis showed that 24 of 26 environmental, social, and governance-tilted index funds outperformed their closest conventional counterparts in the first quarter of 2020 during the COVID-19 crisis.
Very importantly, while it makes perfect financial sense to invest sustainably, more investment in ESG also means that you support companies that are doing the right thing.