Is Sustainable Investing for You?
Updated: Mar 13
Very few of us, looking back at the big picture for 2020, would likely say, “it was a good year.” And yet, especially for certain investment sectors, 2020 was, in fact, a record year. One of the sectors that had tremendous growth in 2020 was the sustainable investing sector. In fact, funds that focus on this sector had record inflows: $51 billion in 2020, up from $21.4 billion in 2019.
Investors who focus on sustainable investing are looking for funds investing in companies that employ sound environmental, social, and governance (ESG) practices. The reasoning is, in part, that such companies are likely20210621 Sustainable Investing - BigStock.jpg poised to thrive as climate change, social justice issues, and transparent corporate practices become more and more important to individuals and economies worldwide. Examples of such practices might include a company’s investment in clean energy, strategies for increasing ethnic or gender diversity among corporate leadership, or initiatives designed to provide greater transparency to shareholders or consumers of the company’s products.
Investors’ motivations for interest in sustainable investing vary. Some simply wish to avoid supporting companies or industries that, they believe, are not making the world a better place—such as weapons manufacturers, tobacco companies, or firms that have a track record of polluting the environment or running sweatshop factories in countries with emerging economies. Still others hope to mitigate downside risk in their portfolios by investing according to sound ESG practices. They believe that by screening out firms that are not sensitive to ESG issues, they can reduce the risk of earnings surprises when a company is sanctioned, fined, sued, or boycotted for its less-than-savory practices.
Jon Hale, director of sustainable investing research for Morningstar Inc., a major investment research firm, points to several factors that may be adding to the current rising interest in sustainable investing. He includes the COVID-19 pandemic, the Black Lives Matter movement, and the worsening climate crisis as trends pushing many investors toward sustainable investment. “A lot of people have sustainability preferences, you might call them, that are being reinforced by so many things going on in the world today. More people are realizing they can express their sustainability preferences through their investing,” Hale says.
“That’s all very well,” you may say, “but how does all this stack up in terms of investment performance?” Well, according to the Morningstar mutual fund research group, in 2019, 35% of sustainable investing funds finished in the top quartile of fund performance in their category—which is well above average for any sector. In 2020, 75% of sustainable equity funds ranked in the top half of their Morningstar category. In other words, for many investors, sustainable investing represents an opportunity to “do well by doing good.”
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