While the coronavirus pandemic induced a global recession and months of severe market volatility in the first half of 2020, sustainable funds—across stocks and bonds—weathered the period better than portfolios without a focus on environmental, social and governance (ESG) factors, according to a report by the Morgan Stanley Institute for Sustainable Investing.
An analysis of more than 1,800 U.S. mutual funds and exchange-traded funds (ETFs) show that sustainable equity funds outperformed their traditional peers by a median of 3.9% in the first six months of the year, according to the report. During the same period, sustainable taxable bond funds beat their non-ESG counterparts by a median of 2.3%.
A longer time horizon shows similar findings. For the full-year 2019, sustainable equity funds outpaced traditional portfolios by a median of 2.8%, while sustainable taxable bond funds outperformed their traditional peers by a median of 0.8%. The Institute’s new report builds on its 2019 insights, which showed that in any given year from 2004 through 2018, median performance for sustainable funds was in line with that of traditional counterparts and provided more downside risk protection, especially during periods of increased market volatility.
“Sustainable investments have continued to perform well in volatile markets, reinforcing the value of sustainable investing and further dispelling the myth that investors who include sustainability considerations in their portfolios face a financial trade-off,” says Audrey Choi, Chief Sustainability Officer at Morgan Stanley and CEO of the Institute for Sustainable Investing.
The comparative analysis bolsters favorable perceptions of sustainable investing that are becoming more widely accepted among asset-owner institutions, individual investors and asset managers, who see potential for sustainable portfolios to yield attractive financial returns, alongside positive environmental or social impact.
In the U.S., about half of individual investors have adopted sustainable investing, while 80% of asset-owner institutions are integrating sustainability considerations into their investment processes, according to the Institute’s 2019 and 2020 Sustainable Signals reports. Evolving regulations are also pushing companies to disclose more information about their sustainability practices, giving investors more data points to measure ESG risks and opportunities.
In analyzing differences between portfolio compositions of sustainable equity funds and their traditional counterparts, the Institute found that in 2019, sustainable funds on average held stocks with larger market capitalizations, and more shares in companies considered growth stocks. These sustainable funds also had lower carbon risk, a measure of exposure to companies with high greenhouse gas emission profiles, according to the report.