Sustainability is an opportunity, not a sacrifice. Finance included
Environment — di Valentina Neri
Do sustainability-focused investments underperform other investments? Not at all: a growing body of research is debunking this myth.
Sustainability is an opportunity, not a sacrifice. Finance included
Do sustainability-focused investments underperform other investments? Not at all: a growing body of research is debunking this myth.
A myth needs debunking: choosing the path of sustainability does not mean making sacrifices. This holds true in the fields of food, energy, mobility and responsible investment alike. The data presented by Davide Pelusi, CEO of Morningstar Italia, at Palazzo Mezzanotte, on the occasion of the launch of the Investimenti Sostenibili LifeGate fund, bear this out.
How widespread are responsible investments
According to data released in November by specialist firm Vigeo Eiris, the assets managed by sustainable retail funds in Europe continue to grow — rising from €135 billion in 2015 to €158 billion this year. In other words, they now account for 2 per cent of the total retail fund market. Meanwhile, the number of funds is consolidating, falling from 1,204 to 1,138 over the past year. France and the Netherlands lead the way, while the United Kingdom is seeing a slight decline. In Italy, there are 17 responsible funds.
How Morningstar's sustainability rating works
Morningstar, the world's most celebrated and authoritative provider of independent financial research, could hardly ignore this growing attention towards responsible investment. So, in March of this year, it decided to launch its sustainability rating. How does it work? Morningstar, which holds up-to-date data on around 500,000 different financial instruments, also has a list of the individual securities held within each fund's investment portfolio. Sustainalytics, a firm specialising in research on ESG (environmental, social and governance) issues, assigns a score of 0 to 100 to the sustainability policies of companies or institutions, and a separate score of 1 to 5 to the severity of controversies in which they have been involved. Morningstar averages all of this data, weighting it according to the sector of the companies concerned and the "weight" of those securities within the portfolio. In this way, it arrives at a score (expressed in globes) for the sustainability of the fund as a whole.
Performance and sustainability go hand in hand
But the question every saver asks remains the same: does choosing responsible investments mean resigning oneself to lower returns? The answer is no, according to a recent Morningstar study summarising the evidence drawn from a long series of academic papers. Studies conducted over the past decade have examined numerous types of sustainable fund, reaching a clear conclusion: returns are in line with those of conventional investments. What is more, over the past fifteen years the MSCI KLD 400 index, which includes companies with high sustainability standards, has consistently outperformed the basket of the five hundred largest US companies by market capitalisation (the S&P 500 index).
Source: Morningstar
Fifteen years of data give responsible investments a pass mark
Morningstar has also gone a step further than existing academic research. Here, the starting point is the Morningstar rating, a scale measuring risk-adjusted returns net of the costs borne by each fund, ranging from a minimum of one star to a maximum of five stars. Drawing on data covering thousands of investment funds from 2002 to 2016, analysts compared those classified as sustainable with the entire universe. Once again, they demonstrated that the two groups deliver similar performance.
Looking even more closely, one can try to understand whether differences exist between the various responsible investment strategies. On the one hand, the less ethical sectors — such as tobacco, pornography, weapons and gambling — can be excluded from the investment universe. On the other hand, environmental, social and governance considerations can be explicitly integrated into the selection of securities in which to invest. The data seem to suggest that the second approach delivers better performance than the first. In other words, the results reward the boldest and most innovative funds.