Sustainable Investing – “Another Fad… Another Investment Trend… Another Marketing Ploy by the capital market moguls” you may say. After almost three decades of debate about the pros and cons of “Socially Responsible Investing”, it is only fair for an investor to question the intent of this new phenomenon. I questioned it.
But the recent economic downturn coupled with numerous environmental catastrophes and social/governance troubles over the past decade has changed the dynamics of the global economy substantially, therefore, making a case for an investment discipline. Investors have had their hands burnt chasing short-term returns and are now looking to invest in forward-thinking companies with sustainable business models.
Just to set the record straight, corporations that integrate environmental, social and governance factors into their business decisions are not at a competitive disadvantage. In fact, it is quite the contrary. Strong environmental performance:
- is generally indicative of good management;
- reduces costs by reducing waste, and therefore, driving efficiencies into their bottom lines and ultimately more profitable;
- helps companies take advantage of new trends and new markets;
- mitigates regulatory and legal risks;
- builds brand loyalty;
- boosts employee enthusiasm and retention.
And lastly, for those who are more interested in generating higher returns, consider the following market-related performance and investment trends to assess the opportunities in sustainable investing:
- According to a recent study by A.T. Kearney, 99 sustainability-focused companies outperformed the broader market by an average of 10 percent from September to November 2008, and by 15 percent from May to November 2008. (Refer to the Research Report here)
- The Dow Jones Sustainability World Index (DJSI) returned 4.5% over the two year period ending September 2010 while the Dow Jones Industrial Average (DJIA) lost 0.6% during the same time period. The longer term returns are even more favorable with DJSI returning 10.7% versus the DJIA’s 2.1% over the five year period ending September 2010.
- Similarly, the MSCI World ESG (Environmental, Social & Governance) Index returned 6.94% and (-7.28%) over the past one- and three-years respectively outperforming the MSCI World Index (although, marginally) by 0.4% and 0.5% over the same time periods ending September 2010.
While there is sufficient empirical evidence to show that sustainable investing has done well in the last little while, it does make sense for investors with a long-term view. It’s a no-brainer that the “Financial Returns is all that matters” theory has failed most investors in the recent global economic downturn. However, following this investment discipline not only GUARANTEES social and environmental returns over the long term, but it is also satisfying to make investments that are in line with one’s values. After all, sustainability of the human race and the planet matter, not just profits.