NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Wednesday, March 25, 2015

Millennials? They really want to invest this way. Women? Even more so. Basically everyone thinks it’s a nice idea, but they’re persuaded it’s going to kill their investment returns. They’re wrong. And today there’s additional data to show it.

I’m talking about sustainability. It’s an ugly word—vague and loaded with preconceptions. A year ago, I said as much to Audrey Choi, chief executive officer of Morgan Stanley’s Institute for Sustainable Investing, who was on a tear about how investors don’t have to sacrifice profits to invest for the future. Blah blah blah. It’s a refrain one hears a hundred times a day in the sustainability space. Where’s the proof? If sustainability* is so great, where are the numbers? Her response at the time: We’re working on it.

Today she’s back, and she’s brought us numbers.

“The worst thing for the entire field is if we get more and more mainstream investors in there, and they discover that the performance isn’t what they expected,” Choi told me by phone last week. “We really felt like we needed to dig into the data.”

$1 Out of Every $6 Now Uses Sustainability Strategy

Morgan Stanley analyzed performance data for 10,228 open-end mutual funds and 2,874 managed portfolios known as Separately Managed Accounts (SMAs). They compared investment strategies that use environmental, social, and governance data—sustainability metrics—to those that don’t.

Sustainable investments in almost every asset class performed as well, or better, than traditional investment strategies. Sustainable equity mutual funds had equal or higher median returns and equal or lower volatility for 64 percent of the periods examined over seven years.

In contrast, the managed portfolios underperformed traditional counterparts for 64 percent of the periods. But the sustainable investments had significantly less volatility, and on a risk-adjusted basis, they performed similarly.