Investing with a Purpose

This article is an educational piece about sustainable investing. For informational purposes only.

The rise of sustainable investing

Interests in sustainable investing have been rising – all in the name of doing good. According to Morningstar¹, 2020 saw a record USD51 billion net inflows into sustainable funds, more than double the total for 2019 and nearly 10 times more than in 2018. Green funds continued blossoming this spring, recording nearly USD21.5 billion in net inflows in the first three months of 2021!² (Refer to Figure 1). And if you are currently invested in mutual funds, you would have received notices from fund houses informing shareholders that they are incorporating environmental, social, and governance (ESG) into their investment processes. So, what exactly is sustainable investing and what does it mean to investors?

Figure 1: Quarterly net flows into sustainable funds

Source: Morningstar

What is Sustainable Investing?

Sustainable investing can be confusing with technical jargons such as “ESG” and “impact investing”. At Standard Chartered, we simply define this as investing in solutions that not only give financial returns but also generate social and environmental benefits.  It  is essentially investing in companies that have business practices and goals to mitigate the challenges facing our society and planet.

Why Sustainable Investing?

1. Make an impact 

Beyond improved media coverage and scientific communication, formal accords such as the Paris Agreement on Climate Change have solidified the realisation that the only viable future is a sustainable, low-carbon one and many investors recognize this hard truth.

The impact of the pandemic on the “haves” and “have-nots” has put the spotlight on rising income inequality. Reducing inequality is a vital part of the UN’s Sustainable Development Goals (SDGs), a set of ambitions it seeks to achieve by 2030. Yet, there is still a persistent funding gap of USD2.5 trillion annually that must be bridged to hit those targets. 

The world faces major sustainability challenges such as climate change, ageing population, and inequality, all of which require radical solutions that will bring huge changes to the global financial system, society and the environment. By facing up to these challenges and holding bold visions of the future, you can make a real (and positive) impact on society and environment while still achieving your financial goals with sustainable investing.

2. Outperforming returns

Many people believe that sustainable investing carries with it an element of sacrifice. In other words, lower returns for the greater good. However, data shows otherwise, and sustainable investing has actually outperformed the wider market.

According to the Morgan Stanley Institute for Sustainable Investing³, in 2020, U.S.-based sustainable equity and bond funds outperformed their traditional peers by a median of 4.3% and 0.9% respectively in terms of total returns.

Sustainable investment strategies performed particularly strongly in 2020 as policymakers focused on “building back better” after the pandemic. The widespread exclusion of fossil-fuel stocks also helped performance in 2020.⁴ However, data shows that this is not just a recent phenomenon. According to Morningstar Research⁵, over the past decade, almost 60 percent of sustainable funds outperformed their ‘conventional’ peers. 

3. Long-term resilience 

Evidence suggests that sustainable portfolios can be less risky than their conventional counterparts.⁶ This would mean that even if they ultimately deliver the same return, the risk-adjusted return of these portfolios is more attractive.

This was demonstrated last year, as investors digested the impact of the pandemic. Earnings estimates for more sustainable companies fell by a smaller amount than estimates for less sustainable companies.⁷

Sustainable investments have shown great(er) resilience in difficult markets. This should come as no surprise. Simply put, sustainable companies have delivered better performance across areas like culture, supply chain management and customer relations. Furthermore, they are also less likely to be exposed to risks that may be caused by sustainability and governance issues such as scandals. It gives them a greater ability to manoeuvre through uncertain times. Ultimately a key part of managing a company for long-term is sustainable success, ensuring it is robust enough to navigate periods of volatility and change like we have seen in the last year.

This was similarly being demonstrated in previous market sell-offs as seen in Figure 2. The MSCI ESG Universal Index, which includes companies with a strong ESG profile while minimising exclusions from the parent index, has clearly outperformed the MSCI All Countries World Index in past crises.

Figure 2: Companies with higher ESG scores performed better in previous market crises

Source: BlackRock, Aladdin

How can you incorporate sustainable investing into your portfolio?

A sustainable portfolio would be a diversified one, across asset classes that match your risk and return goals. Some investors may allocate a certain portion of their portfolio to sustainable strategies while others build portfolios that are 100% sustainable.

You are not short of options when it comes to sustainable investing. The size of the green asset market continues to grow across all segments. Equities, (green) bonds, mutual funds and even structured products – there is always a solution for anyone who yearns to invest with a purpose.

At Standard Chartered, we have launched ESG Select, a product evaluation framework, which provides curated wealth solutions for clients to express personal views in their investments and capture sustainable development opportunities.

Our ESG Unit Trusts are mutual funds which have been selected based on our proprietary ESG fund selection process. Below is a list of our ESG Unit Trusts:

• United Sustainable Credit Income
• Allianz Global Sustainability
• BNP Paribas Aqua
• Ninety One GSF Global Environment Fund

In conclusion, sustainable portfolios may eventually become the norm as evolving regulation, market pressure and consumer preferences force most companies to realign their businesses to thrive in a greener world. But for now, the rising demand for sustainable investments is poised to boost valuations further, which will in turn benefit your overall portfolio performance. It’s not too late; ride this wave and add an element of sustainability to your portfolios today!

To find out more, click here.

Profile

A globetrotter at heart, Winnie did not stop being one even after becoming a mother of 2; in fact, her children are her greatest travel partners! During her free time, besides planning for her next vacation, Winnie also enjoys listening to Maroon 5 and Ed Sheeran going on quiet drives, spending time with her family and friends, and watching football. One of her biggest moments as an Arsenal fan was watching the team play from the stands at the Emirates Stadium.

References

[1] Source: Morningstar – A Broken Record: Flows for U.S. Sustainable Funds Again Reach New Heights

[2] Source: Morningstar – Sustainable Fund Flows Reach New Heights in 2021’s First Quarter

[3] Source: Morgan Stanley – Sustainable Funds Outperform Peers in 2020 During Coronavirus

[4] Source: Schroders Wealth Management – Investing with purpose: what it means for returns

[5] Source: Morningstar – How Does European Sustainable Funds’ Performance Measure Up?

[6] Source: Schroders Wealth Management – Investing with purpose: what it means for returns

[7] Source: Sustainalytics, IBES, BofA