The past couple of months have been challenging as the world struggles to adapt to the spread of the COVID-19 virus. The health crisis has directly impacted millions, and mitigation efforts to slow the spread have led to an aggressive slowdown in economic activity due to the closure of restaurants, shops, and local business.
Clients of mine who have requested greater transparency to where and how their money is invested have seen their investments perform better than conventional approaches while at the same time knowing their investments are promoting positive change. For many younger, high income earners, the way they invest matters, and sustainable investing offers the opportunity to build wealth responsibly without sacrificing investment principles.
In the midst of the COVID-19 global pandemic, sustainable investing continues to be a force for positive change—changing the investment industry, improving companies, and helping communities.
Sustainable investing has helped change the investment and financial planning industry by challenging, and then adapting, traditional approaches in the investment decision-making process and financial planning, while creating greater transparency and adding investment options in the process.
During the first quarter of 2020, sustainable investing equity funds held up better than their conventional peers. Seven out of 10 sustainable equity funds finished in the top halves of their Morningstar Categories, and 24 of 26 ESG-tilted index funds outperformed their closest conventional counterparts.
Contributors to outperformance included a higher allocation to high-quality companies, and a lower allocation to energy. A primary feature of sustainable investing strategies is what is referred to as ESG (Environment, Government, and Social) incorporation, or incorporating ESG issues when building investment portfolios. This process leads to an emphasis on companies that exhibit better ESG ratings relative to their peers. These companies typically have fewer hidden risks and are more resilient to unexpected events, like we are experiencing now. The fact that sustainable funds have been holding up well in this market makes sense considering those funds with better ESG ratings relative to their peers have given thought to and developed policies around environmental concerns, such as resource depletion; social concerns, such as employee relations; and governance concerns, such as board diversity and structure. Having transparency and policies around these concerns exemplifies long- term financial planning and preparation for all different types of contingencies.
While the depth and breadth of outperformance during the first quarter was impressive, it may be surprising that it is consistent with longer-term performance as well. The MSCI KLD 400 Social Index — an index of 400 US securities that provides exposure to companies with strong relative ESG ratings and excludes companies whose products have negative social or environmental impacts — has outperformed the S&P 500 Index since its inception May 1, 1990. This is a huge advancement in the world of socially responsible investing!
If an investor had placed $10,000 in the MSCI KLD 400 Social Index on May 1, 1990, it would have grown to $175,430, compared with $156,480 if invested in the S&P 500 Index over that same time period. This is equivalent to an annualized return of 10% for the MSCI KLD 400 Social Index versus 9.6% for the S&P 500 Index.
COVID-19 Impact Today On ESG
In the early stages of the COVID-19 global pandemic, sustainable investors used their relationships with company management for the benefit of the greater good. Recognizing that the long-term viability of the companies in which they invest is completely tied to the welfare of companies’ stakeholders—including their employees, suppliers, customers, and the communities in which they operate—sustainable investors urged the business community to take specific actions.
Sustainable investing has also been at work positively changing communities through community- oriented investing. This type of investing brings capital directly to underserved communities that conventional markets do not reach, such as low-income neighborhoods and rural communities.
One approach is to invest in government-backed securities that target low- and moderate-income communities, which offers both the potential for social benefits to underserved communities and economic advantages to investors.
The past couple of months have been challenging as the world has struggled to adapt to the spread of the COVID-19 virus. Within this setting, clients who have demanded greater transparency about how and where their money is invested have seen their investments perform better than conventional approaches while knowing their investments are promoting positive change. In the midst of the COVID-19 global pandemic, sustainable investing continues to change the investment industry, improve companies, and help communities.
Now is the time to consider your investment and financial planning strategies and the impact they are making on both your portfolio returns, but also your community as a whole. Whether in our San Luis Obispo or Salt Lake City office, we would invite you to share your concerns about the impact of your financial investments. Talk to Mike and schedule a complimentary consultation.
Global Sustainable Investment Alliance, 2018
Sustainable Funds Weather the First Quarter Better Than Conventional Funds,” Morningstar, April 3, 2020
“Despite the Downturn, U.S. Sustainable Funds Notch a Record Quarter for Flows,” Morningstar, April 9, 2020
“Investor Statement on Coronavirus.” Domini. March 26, 2020
RBC Global Asset Management, as of September 30, 2019.
RBC Access Capital Strategy Update. RBC Global Asset Management. April 1, 2020.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual. There is no assurance that the products or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
Sustainable investing is subject to numerous risks, chief amongst them that returns may be lower than if the advisor made decisions based only on investment considerations.
All performance referenced is historical and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
Any securities discussed in this material for illustrative purposes should not be construed as investment advice or recommendations for your clients.
In an effort to distinguish funds by what they own, as well as by their prospectus objectives and styles, Morningstar developed the Morningstar Categories. While the prospectus objective identifies a fund’s investment goals based on the wording in the fund prospectus, the Morningstar Category identifies funds based on their actual investment styles as measured by their underlying portfolio holdings (portfolio and other statistics over the past three years). See Morningstar Category for Funds Definitions (April 2020) for further details.
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI KLD 400 Social Index is a capitalization weighted index of 400 U.S. securities that provides exposure to companies with outstanding environmental, social, and governance (ESG) ratings and excludes companies whose products have negative social or environmental impacts. The parent index is MSCI USA IMI, an equity index of large, mid and small cap companies. The Index is designed for investors seeking a diversified benchmark composed of companies with strong sustainability profiles while avoiding companies incompatible with values screens.