According to the research of Morgan Stanley Institute for Sustainable Investing, Sustainable Reality: Analyzing Risk and Returns of Sustainable Funds, there are no significant difference between the returns of sustainable funds and traditional funds. These funds also remain more stable in times of crisis where volatility is at extreme levels.
In 2018, the Forum for Sustainable and Responsible Investment (US SIF) indicated that more than one out of every four dollars invested in U.S capital markets included sustainability in its investment approach. Similarly, 75% of investors state that they are interested in sustainable investment. However, 53% of investors believe that the returns of sustainability funds are lower than returns of traditional funds.
The research uses data provided by Morningstar on stock exchange funds between 2004 and 2018. Within the scope of the research, 10,723 funds were analyzed and their performance in terms of total return, net return and downside deviation (a measure of risk) were compared. This comparison was made between traditional funds and sustainability funds that are focusing on environmental, social and governance factors.
Findings show that there is no significant difference regarding returns on sustainable and traditional funds. Prior to 2008, traditional funds had higher returns in some asset classes. However, there is no difference in returns between different asset classes when compared today. It is observed that over the years, the difference in returns has decreased.
When analyzed in terms of market risk, it is seen that sustainable funds constitute a more stable option in periods of high market volatility such as 2008, 2009, 2015 and 2018. In the last quarter of 2018, the volatility of the U.S. market showed a sudden increase. Although the net return of both funds was negative in this period, the median sustainable fund outperformed the median traditional fund by 1.39%. As a result, it is possible to say that sustainable investment strategies may offer protection from downside risk to their investors in times of high volatility. It is reported that, sustainable funds were found to carry 20% less downside risk than traditional funds.
Research evaluating thousands of assets through 14 years, it has been proven that the return of sustainable funds does not differ from traditional funds. In terms of risk, it shows that sustainable funds are more stable and can be preferred during periods of high volatility. As a result, it is possible to say that environmental, social and governance (ESG) factors carry valuable information for investment portfolios.