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Does Sustainable Investing Always Lead to Lower Returns?

Jimmy Khan

Aug 10, 2022 15:38


Links from our affiliate partners may appear in some of our content. This helps fund the website since 10% of the revenue is donated to sustainable groups that share our ideals. However, this has no bearing on our ratings or judgments. 

Because they think the sustainable investment would provide lesser profits, many individuals are reluctant to become involved. But this doesn't need to be the case at all times, and investors may benefit the environment while also earning excellent profits. Even if many believe that sustainable investment does not result in any meaningful impact or accomplishes nothing for the world and its inhabitants, this is still achievable.

This kind of investing focuses on reducing emissions and gives investors greater transparency so they can choose their investments more wisely.

Does investing sustainably result in reduced returns? In today's post, we'll cover this subject in greater detail.

Is sustainability investing profitable?

To test this hypothesis, Fidelity International compared all 2,659 businesses covered by Fidelity's stock analysts and 1,450 companies in our fixed income universe.

It was only a quick test. It was simple to determine if stock market success was connected to our A-E rating system since we graded the firms we monitor according to their ESG characteristics.

The most highly rated businesses performed best, followed by the second-highest group, and so on, all the way down to the worst-rated and worst-performing category, according to our analysis, which we carried out in October 2020 using data for the first nine months of the year. Though not entirely surprised, we were thrilled by this finding as it was consistent with our expectations.

There was a linear association. From A through E, each group defeated the one below it.

Sustainable investing: What is it?

A long-term investment strategy, sustainable investing, tries to increase and preserve a financial portfolio's sustainability. This might include investing in green companies, getting out of the fossil fuel sector, or establishing rules to protect the environment for future generations.

Sustainable investors seek for and make investments in companies that, in their opinion, offer long-term worth beyond short-term financial gains.

The primary goal of sustainable investment is to increase financial returns while preserving or improving the environment. Finding methods to invest in companies that safeguard our planet and its inhabitants is the goal.


The Distinction Between Traditional and Sustainable Investing

Conventional investment ignores a company's activities' effects on the environment or society, often resulting in major issues like pollution, deforestation, and climate change.

However, because of its proactive nature, sustainable investment does consider these factors. A sustainable investor doesn't want to finance projects that can endanger the planet or its population.

Traditional investors are more focused on the present. Even if it does hurt society, people invest in companies they think will earn them money or be successful.

Imagine you're in the market to purchase a car, and two dealerships are offering identical models at comparable prices, one of which manufactures cars that unsafely pollute the environment.

Despite the potential harm vehicles may do to society and the environment, the average investor may decide to buy from the first company since it is more profitable.

Sustainable investors seek companies actively working to maintain a healthy, beautiful environment. They are aware that this does not always include investing only in green enterprises but rather seeking out possibilities where sustainability is a factor. Any kind of company, including oil firms, is a viable option for these investments.

The Most Common Illusion Regarding Sustainable Investing

Many individuals who are unfamiliar with it think it has no effect on carbon emissions and has no environmental benefits. This is only partially true since green investments reduce greenhouse gas emissions, but it takes time for the change to be seen.

There is a common misconception that sustainable investment doesn't produce significant change, but this isn't always the case. Sustainable investors seek opportunities to invest in businesses that will provide long-term value.

By doing this, they are aligning their financial support with companies working to protect the environment and ensure the survival of future generations.

Investing in sustainable projects is important.

Sustainable investing is the practice of taking environmental, social, and governance (ESG) considerations into account when making investment choices. ESG variables might include things like greenhouse gas emissions, violations of human rights, staff diversity, and harm to the environment.

Sustainable investment is becoming increasingly crucial as investors become more aware of the dangers of social injustice, climate change, and other issues. ESG factors are increasingly being taken into account by many large institutional investors when making choices.

Sustainability has also emerged as a crucial factor for businesses and investment managers. Many conventional mutual funds and ETFs invest in businesses that follow specific sustainability standards. Through several online platforms, individual investors may now invest in companies focusing on sustainability.

The Advantages

Combining environmental, social, and governance (ESG) considerations into investment research and decision-making is known as sustainable investing or socially responsible investing.

Because they not only concentrate on reducing carbon emissions but also generate employment and do not waste natural resources, socially responsible investments are well-liked. Along with lowering carbon emissions, it also creates jobs and reduces waste.

Impact investing, which considers environmental, social, and governance aspects while making investment choices, is receiving more attention.

It offers several advantages, including generating favorable social and environmental effects while still generating financial returns, reducing risk and volatility in one's portfolio, luring in new investors concerned with the environment and society, and helping companies grow sustainably.

The Negatives

The downsides of sustainable investment, on the other hand, are many. One of the main disadvantages of impact investing is many people establishing green funds without fully knowing what they're investing in.

There is no method for a sustainable investor to determine if the companies that make up a sustainable fund engage in sustainable business practices.

Another drawback is the exclusion of certain industries from sustainable investment, such as the production of weaponry and oil. While this does help to reduce carbon emissions and improve the environment, it has no impact on the business activities of these companies so they can run more sustainably.

Many sustainable investors believe they can only gain by concentrating on sustainable investment is a final disadvantage. The fact that these changes just take time to manifest and subsequently become obvious means that this need not be the case.


Does splurging on the environment result in lower returns?

No. In a new analysis, BlackRock claims that over the last 25 years, sustainable or impact investment has outperformed non-sustainable investing or conventional peer funds.

According to McKinsey & Company, there are $30 trillion in finances associated with climate change and $3 trillion in renewable resources.

Not to mention the billions of money spent over the years on every other survival effort, including healthcare and education. By 2050, if we stay on our present course, this will total $120 trillion.

According to these figures, McKinsey asserts that investing in capital expenditures alone may cut tons of carbon dioxide emissions yearly for merely 2% GDP growth (40% from firm savings and 60% from lower external loan costs).

Consequently, the price of inaction is often high and does not always provide better results. By making smart investments that align with our values and beliefs, sustainable investing enables us to protect and expand our access to the future.

Corporate Financial Performance: Transparency Is Everything

As was already noted, sustainable investment has certain drawbacks, but many experts think it has a lot of promise. This does not imply that it always results in poorer profits; rather, it may encourage businesses to become more open to conduct more morally and sustainably.

This does not imply that investors should just invest blindly in green funds since doing so has no impact on the ability of these businesses to become more sustainable.

What Are the Steps to Become a Sustainable Investor?

It involves including environmental, social, and governance (ESG) concerns in your investment study.

According to sustainable investors, businesses that properly manage these risks will outperform over the long term. They also believe that including ESG considerations in decision-making may aid in averting crises and opening up new opportunities.

To become a sustainable investor, you can do a few crucial things. For example, you may study ESG investing and sustainability principles, inquire about the ESG performance of firms while researching investments, and use screening tools to help locate sustainable assets.


case study

We wanted to examine a few scenarios to better understand how the two compare now that we've shown that impact investments don't always result in lower returns than standard investments. Three case studies will be taken into account to do this:

  • comparisons of indices

  • Comparisons of mutual funds

  • Performance of the credit portfolio and ESG

Case Study #1 Index comparisons (MSCI KLD 400 vs. S&P 500)

In addition to individual funds, indexes may provide a broader perspective on stock performance over the long term. Two significant indexes that monitor the performance of corporations that practice social responsibility are the MSCI KLD 400 (formerly the Domini Social Index) (USA) and the Jantzi Social Index (Canada). By comparing their performance with conventional equities included in the S&P 500 and TSX 60 indexes, we may examine their performance.


The MSCI KLD 400, formerly known as the Domini Social Index, was created in 1990 and comprised 400 businesses that adhere to exacting requirements for social responsibility and environmental excellence. It has monitored these firms' performance versus the S&P 500 for the previous 30 years. As you can see, over the last 25 years, conventional equities have regularly underperformed the social index. The difference between the MSCI KLD 400 and the S&P 500 is expanding as socially conscious investment picks up steam yearly.


In 2000, Dow Jones Indexes and Jantzi Social Indexes formed a joint venture. It is a market capitalization-weighted, socially vetted common stock index, similar to the MSCI KLD 400. It comprises 50 Canadian firms that adhere to ESG standards in corporate governance, community participation, environmental protection, and human rights. Although this index is not as old as the MSCI KLD 400, it suggests a comparable result. The index's constituent companies have generally outperformed conventional equities, particularly after 2012.

In conclusion, comparing these two indices shows that socially conscious investments outperform conventional ones, with the gap widening in the latter part of the 2010s.

Second case study Comparisons of mutual funds

Mutual funds are among the simplest options for investors to engage in socially responsible investment. We will make use of a 2019 analysis from RBC to examine if SRI causes poorer returns for regular investors.

To evaluate the performance of SRI and non-SRI mutual funds, the paper examines 36 SRI fund studies from more than ten countries. Numerous studies have shown, despite conflicting data, that positive screens may be utilized to boost portfolio performance. After a specific number of screens have been run, the businesses that stay in the portfolio have lower risk and greater performance than their non-sri counterparts. Another important discovery was that, given the ambiguity of the SRI concept, the overall performance of SRI funds might be impacted by the labeling (or lack thereof) of SRI funds.

There is little evidence that SRI funds consistently outperform conventional mutual funds. And although there is a lot more data to support the idea that SRI mutual funds perform better than conventional mutual funds, the findings are not universal.

Case Study #3: The effect of ESG on the performance of Barclay's credit portfolio

The last case study we'd like to look at examines the effect of ESG on the performance of credit portfolios, which institutional investors predominantly control. Based on a survey conducted by Barclay's in 2016, we want to respond to the following: The financial performance of a bond portfolio is either made better or worse by including environmental, social, and governance variables in the investing process. "A positive ESG tilt resulted in a slight but continuous performance benefit," the study's conclusion said.

Due to the complexity of ESG criteria, measuring the link may be challenging, as it is with many other types of socially responsible investment. Results vary by region, sector, and market, but a study published in the Journal of Sustainable Finance & Investment comes to the following definite conclusion: The paper, which compiled findings from over 2,200 original studies, claims that fewer than 10% of published studies demonstrate a negative relationship between corporate social responsibility and financial success, while almost half of the studies show a favorable correlation.

We are sure that ESG may enhance the performance of a bond portfolio based on Barclay's study and the summary from the Journal of Sustainable Finance & Investment.

Are ESG investments more profitable?

We divided and reconfigured our universe of businesses to answer that question. This time, we categorized the businesses according to their return on equity into five groups (a shorthand for quality). Then, we performed the same ESG rating inside each of these groupings. To our relief, we discovered that the correlation between the ESG rating and stock market performance persisted regardless of the quality category you selected.

Fidelity experts also assess if a company's ESG characteristics are enhancing, maintaining, or degrading as they examine it. We questioned if this may also be a performance predictor. Indeed, we discovered that businesses with an increasing ESG profile did better than stable businesses, which in turn performed better than businesses whose attention to environmental, social, and governance aspects is deteriorating.

We saw a similar result when we examined the bond performance and ESG ratings. Although there wasn't nearly as much of a link as there is with stocks, the proof is still significant.



It may be time to think about sustainable investing if you're seeking a means to make investments for the future.

The expanding trend offers a chance to increase profits while simultaneously doing good; it's not simply about avoiding risk by rejecting specific sectors or businesses based on environmental, social, and governance (ESG indicators or aspects).

Because they can reduce the risks associated with climate change, support gender diversity among employees of publicly traded companies, and address human rights abuses abroad that may impact your portfolio without sacrificing returns, sustainable investments are positioned as win-win situations.