With the effects of climate change and pollution becoming more apparent, the impact they have on our environment is hard to ignore. From rising temperatures to desertification and melting ice caps, it is evident that our environment should be a priority, and it increasingly is. Beyond creating awareness about one of our century’s biggest challenges, the conversation about climate change has led to varying innovative solutions to combat its effect and hopefully change the way we live. The result is the opportunity to invest in companies that aim to achieve market-rate financial returns while pursuing environmental and/or social impact, commonly known as ESG (environmental, social and governance) investing¹. If the idea of sustainable investing is new to you, our previous article on Investing with Impact, is a good starting point.
Sustainable investing has been on a steady rise, and sustainable investments have continued to surge even as the pandemic spread worldwide. Millennials (born between 1981 and 1996) are among the largest age-groups with a rising interest in ESG investing. They are more engaged in corporate social responsibility efforts and are driving up demand for sustainability. They are also influencing the older generation to become more aware of ESG investing. Recent research on the intergenerational transfer of wealth by Barclays Private Bank found that interest in sustainable investing by wealthy families has risen because of the younger generation and has led families to increase their allocations to sustainable assets².
While interest in sustainable investing continues to grow, there are some associated misconceptions, which we would like to discuss.
Myth 1: Sustainable investing makes less return
With any investment, one must acknowledge that the value of investments and the income from them may go down as well as up and that they may not get back the amounts originally invested. Sustainable investing is no different.
A common misconception about sustainable investing is that you may make less returns. In some cases, sustainable investing strategies have delivered higher, not lower, returns. The most recent data comes from the Covid-19-related global sell-off in February/March 2020, where companies that scored highly on ESG ratings outperformed the broader market³. When integrated with traditional methods of evaluating a company’s prospects, sustainability analysis can improve judgment and enhance performance.
A Morningstar report found that from 2009–2019, 59 percent of surviving sustainable products outperformed their conventional counterparts. Along with this, 72 percent of sustainable funds survived the 10-year period, compared to 46 percent of traditional funds⁴.
Myth 2: Sustainable investing is only applicable to stocks/shares
While it may be true that sustainable investing strategies are mostly sourced from equity markets, this is because equities are a popular and liquid asset class, which results in vast datasets that can be easily analysed. Sustainable investing strategies can also apply to alternative asset classes and, in some cases, are potentially more relevant. In private equity, where investments are locked in for more extended periods, it is important to consider the ESG factors, as investors want to be confident that companies are managing future or long-term risks that may not have materialised yet⁵.
Myth 3: Sustainable investing is expensive
Although institutional investors account for 75 percent of global ESG investments, retail-based investments have grown quickly⁶. Several sustainable investing funds have become more accessible for regular individual investors. The entry of large players and increased investor demand has made sustainable investing more accessible.
Myth 4: Sustainable investing is a fad
For some, sustainable investing is a trend they expect to die soon. In reality, a lot of money is being invested in ESG funds. Millennials and Gen Z are incredibly vocal about their support for sustainable investing, as well as the need for more ethical and social investments. The Covid-19 pandemic has, without doubt, also accelerated the adoption of sustainable investing strategies. Historical evidence shows it works as an investment strategy, and the more people realise that sustainability matters, one can only expect sustainable investing to grow. If you have considered making a positive difference through your investments, sustainable investing might be for you.
When investing, the value of your investment may rise or fall and there are no guarantees you will get back all the capital you have invested.