Doing good and making money

Popular misconceptions are often stubborn. But the belief that investors face a choice between doing good and making money is caving in to evidence that sustainable investing (SI) does not mean inferior performance. Both academic research and the track record of benchmark indexes show that SI can match or exceed the returns from traditional investment approaches.

A 2015 study by Freide, Busch, and Bassen aggregated the results from 2,200 academic studies, which analyzed the relationship between corporate financial performance and environmental, social, and governance (ESG) criteria. In more than 90% of cases, ESG factors were found to have a positive or neutral impact on financial returns.

Since 1990, the MSCI KLD 400 Social index, which includes companies with high ESG ratings and excludes those involved in activities such as alcohol and firearms, has outperformed the S&P 500, with annualized returns of 10.7% versus 10.3%.

The belief that investors face a choice between doing good and making money is caving in to evidence that sustainable investing does not mean inferior performance.

UBS analysis shows that wealthy investors are motivated by sustainable values. The latest UBS Investor Watch survey polled more than 5,300 investors in 10 markets on sustainable investing. We found that 65% believe it's highly important to help create a better planet. As a result, 81% are actively aligning their spending decisions with their personal values, and 69% are paying more for products from companies with sustainable practices.

But these choices aren't always translating into investment decisions. Only 39% say they have sustainable investments in their portfolios. Two factors help explain this disparity.

1. Confusion over terms

Our survey found that while some investors understand the basic concepts, confusion about sustainable investing approaches, and even their impact, is widespread. For example, investors make little distinction among the three major approaches: exclusion, integration, and impact investing. When investors are “unsure of what they’re getting,” they are reluctant to commit.

Education can help address this challenge. The Investor Watch results show that better education often leads to higher adoption. Sustainable investors said they were influenced by multiple sources, including professional advisors, family, friends, and media. Nine in 10 cite an advisor’s impact on their decision to invest sustainably. Our multi-asset SI offering includes a video help investors understand opportunities in SI.

2. A relative lack of opportunities with an established track record.

As recently as 2015, nearly 40% of the impact funds in the ImpactBase database did not have a track record to speak of. Confusion over motives also adds to the problem. Impact can be subjective and investors are often wary that funds are labelling themselves as “sustainable” or “impact” for commercial reasons – the so-called “greenwashing” or “impact-washing.”

As the market matures, however, the pool of suitable investments is growing. Mainstream funds are entering the industry alongside niche specialists in response to increasing investor demand. A closer focus on defining impact should foster understanding and draw in capital. To this end, in 2017, UBS partnered with the Impact Management Project to build industry consensus around the core components of impact. We have incorporated the resulting framework into our impact assessment process for new investment opportunities.

There already appears to be plenty of evidence that SI does not hurt your portfolio, and this is increasingly being reflected in investment portfolios. Through greater clarity over investment approaches and definitions, we are confident that this will grow further still, allowing more investors to partake in one of the more promising secular trends of a generation. As I wrote in a recent op/ed for the Financial Times, “If you aren’t investing responsibly then you are investing irresponsibly.”

Bottom line

The misconception that investors face a choice between doing good and making money is breaking down under the weight of evidence from academic studies and market benchmark performance. Our recent Investor Watch survey found that wealthy investors are motivated by sustainable values, but this doesn’t always translate into investment decisions. There is a need to overcome confusion over investment terms and tighten the definitions of impact.

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ESG/Sustainable Investing Considerations: Sustainable investing strategies aim to consider and in some instances integrate the analysis of environmental, social and governance (ESG) factors into the investment process and portfolio. Strategies across geographies and styles approach ESG analysis and incorporate the findings in a variety of ways. Incorporating ESG factors or Sustainable Investing considerations may inhibit the portfolio manager’s ability to participate in certain investment opportunities that otherwise would be consistent with its investment objective and other principal investment strategies. The returns on a portfolio consisting primarily of ESG or sustainable investments may be lower or higher than a portfolio where such factors are not considered by the portfolio manager. Because sustainability criteria can exclude some investments, investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria. Companies may not necessarily meet high performance standards on all aspects of ESG or sustainable investing issues; there is also no guarantee that any company will meet expectations in connection with corporate responsibility, sustainability, and/or impact performance.