Sustainable Investing equates
to lower performance.
No.
Past performance is not a guarantee of future results. It is not possible to invest directly in an index.
Sustainable investing does not require a performance tradeoff. If we look at environmental, social and governance (ESG) as an example, incorporating ESG factors can provide comparable to enhanced portfolio performance over the long-term. Think of it this way: Embedding ESG analysis leads to more complete and robust data to analyze companies, and more data can lead to better-informed investment decisions and, potentially, stronger risk-adjusted returns. In that sense, sustainable investing can help lead to value creation.
Further, we see environmental and social issues as secular, long-term “megatrends” that can potentially offer attractive investment opportunities. Some of these megatrends include investments in clean energy, electric vehicles and new technologies that increase agricultural yield in water-scarce areas.
Exhibit 1
Historically ESG leaders have strong performance
Return
Standard Deviation
8.2%
8.0%
14.1%
14.3%
Past performance is no guarantee of future returns. It is not possible to invest directly in an index.
Source: Morningstar 1/1/13 - 12/31/22. ESG Equity Leaders = MSCI ACWI ESG Leaders NR USD Index, which invests in the top 50% of MSCI ESG rated companies, Broad Equity Index = MSCI ACWI NR USD Index. See Index Definitions under Important Information
Source: Global Sustainable Investment alliance, “2020 global Sustainable Investment Review”. Asset values are expression in USD billions. Eurosif Categories have been grouped as follows: Exclusionary Screening: Exclusions; ESG Integration: Engagement and Voting, ESG Integration; Positive Screening: Norms-Based Screening, Best Class; Thematic Investing: Sustainability Themed; and Impact Investing : Impact Investing. ‘CAGR’ stands for Compound Annual Growth Rate.
2016
Exclusionary
Screening*
ESG
Exhibit 2
Screening within values based investing was once the most popular approach, however as time has progressed other strategies are gaining significant traction.
It has, and it can. You can have a voice through active managers and corporate engagement strategies
Thematic
Investing
Impact
Investing
+0%
CAGR
$19,771
$15,064
+25%
CAGR
$17,544
$10,353
+63%
CAGR
$1,018
$276
+9%
CAGR
$444
$248
E
Sample key ESG issues
Exhibit 3
Climate change and other environmental concerns are a focus for many sustainable investors and also integral in several of the investment solutions at J.P. Morgan Private Bank. However, social and governance issues—the S and G in ESG—are top of mind for clients as well, and they merit consideration in the analysis of companies and funds (Exhibit 3). Arguably, every investment should focus on the G—sound governance practices are critical to the long-term success of businesses. And social issues such as data security, employee health and safety, and diversity practices are increasingly seen as important in company analysis.
We also find that E, S, and G issues are often interrelated. For example, water stress is not only a risk to ecosystems but it also affects human health and well-being. It can intensify social and political fragilities in emerging economies, such as the Middle East and North Africa (MENA), the most water-scarce region in the world. Greater societal stresses can also lead to forced migration across borders. Further, many of
Not really.
Sustainable investing is solely focused on climate and the environment.
Environmental
Carbon footprint
Toxic emissions and waste
Renewable energy
Supply chain labor standards
Privacy and data security
Access to healthcare
S
Social
Board diversity
Business Ethics
Anti-competitive practices
G
Governance
Industry-specific
Universally applicable
J.P. Morgan: Climate Changes Everything, Part II.
1
Sustainable fund flows set a record in 2019
Exhibit 4
In a recent survey, 99% of millennial respondents reported an interest in pursuing sustainable investments, and when it comes to high-net worth millennials, 9 in 10 consider ESG an important aspect of their investment decision-making . However, that shouldn’t overshadow the wide range of investors contributing to the growth of ESG assets under management. According to PwC’s 2022 survey of asset managers and institutional investors, representing about half of global assets under management (AUM), 79% plan to increase allocations to ESG funds over the next two years. PwC estimates ESG-oriented assets to grow faster than the asset and wealth management industry as a whole, expanding to about 22% of total industry assets by 2026.
And while 2022 proved to be a volatile year for the broad market amidst high inflation, interest rate hikes, geopolitical conflict, and recession fears, investors continued to pour money into sustainable funds while non-sustainable funds suffered outflows -- signaling investors’ conviction in the long-term outlook for many sustainable investment strategies. Morningstar’s sustainable fund universe attracted $164 billion of net asset inflows over 2022, while conventional funds saw $642 billion in outflows (Exhibit 4).
2 Morgan Stanley, “Sustainable Signals”, 2021
3 MSCI, “Swipe to invest: the story behind millennials and ESG investing”, 2020
We don’t think so.
Sustainable investing is just a passing fad.
Source (Exhibit 4): Morningstar Direct. Sustainable funds based off criteria in Morningstar Direct Asset Flows; Sustainable Fund by Prospectus = “Yes”
220
200
180
160
140
120
100
80
60
40
20
0
-20
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
22
20
18
16
14
12
10
8
6
4
2
0
-2
Flows (USD Billions)
AUM (USD Billions)
Flows (USD Billions)
AUM (USD Billions)
Morningstar Direct. Data as of December 31, 2019. Global Sustainable Investment Alliance, “2018 Global Sustainable Investment Review.” Morningstar Research, “Sustainable Funds U.S. Landscape Report.” February 2020. FactSet Insights, “ETF Fee War Hits ESG and Active Management.” January 2020.
Source:
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Exchange Traded
Open End
Universe of sustainable funds continued its multiyear growth trend in the United States
Exhibit 5
Although institutional investors account for 75% of global ESG-themed investments, retail-based investment has been growing more quickly . There are a growing number of sustainable investing funds, and many carry small minimums. Investor demand for less expensive funds and ETFs is driving flows and shaping asset growth. The organic growth rate for sustainable ETFs – calculated as net flows relative to total assets at the start of a period – has accelerated over recent years, and reached 88% in 2020 (Exhibit 5). The entry of large players, coupled with the explosive growth in passive fund and ETF options for ESG investing, have pushed fees down and attracted retail investment.
Certainly not.
Sustainable investing is expensive, and requires a large asset base.
2005
2006
2007
2008
2
8
4
6
24
37
35
38
30
these types of environmental risks have been found to disproportionally affect lower income communities, women, and girls. Given the interconnectedness of ESG issues, our sustainable investing solutions consider a wide range of sectors and themes, including the environment, health and wellness, poverty and diversity.
2018
5
6
7
As of May 15, 2021
Sustainable fund flows remained resilient in 2022
Exhibit 4
Sustainable Funds
Conventional Funds
Net Flows (USD billions)
Universe of sustainable funds continues its multiyear growth trend, with ETF flows surging recently
Exhibit 5
* Exclusionary screening data displayed as a larger whole within VBI
$15,030
$1,948
2020
$25,195
$352
This is just one example of how sustainable investing can help drive change. By investing in actively managed strategies that engage directly with companies, it’s possible to drive positive change over time.
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This chart from 2020 Global Sustainable Investment Review shows the compound annual growth rate in 2016, 2018, and 2020 for Exclusionary Screening, ESG, Thematic Investing, and Impact Investing. It shows that screening within values based investing was once the most popular approach, however as time as progressed other strategies are gaining significant traction. Thematic investing, Impact investing, and ESG have grown in popularity over the course of the 4 years analyzed.
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1
MSCI ACWI Index
MSCI ACWI ESG Leaders Index
-
(150)
(50)
50
100
(100)
Dec
Jan
Sep
Aug
Jul
Jun
May
Apr
Feb
Nov
Oct
Mar
700
600
500
400
300
200
100
0
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0
Sustainable investing doesn’t drive real change
Companies often have a global influence, sometimes for the better (e.g., by being a good employer) and sometimes for the worse (e.g., by polluting a local ecosystem). It’s possible to sponsor specific causes through your investments and potentially impact company behavior.
Let’s dive deeper with a real-life case study. An investment manager holds a leading U.S. manufacturer of cement in its sustainable portfolio. However, it is the portfolio’s largest carbon emitter.
Manufacturing construction supplies is a carbon-intensive process. The transformation of calcium carbonate in limestone into calcium oxide is a vital step to produce “clinker”—a component in cement—which is responsible for about 60% of total cement-manufacturing emissions.
After engagement from the investment manager, the manufacturer has taken steps to decarbonize its operations by:
• Increasing use of alternative fuels
• Reducing clinker content
• Employing carbon capture, utilization and storage technology
The manufacturer has a 20% carbon intensity reduction goal by 2030 versus a 2011 baseline. To encourage further change, the manager will continue proposing a new science-based emissions target. *