Financial Performance with Sustainable Investing

Sustainable investing spans a wide range of products and asset classes, embracing not only public equity investments (stocks), but also cash, fixed income and alternative investments, such as private equity, venture capital and real estate. Sustainable investors are like other investors in seeking a competitive financial return on their investments. The evidence is clear that investors do not have to pay more to align their investments with their values, or to avoid companies with poor environmental, social or governance practices.


The Morgan Stanley Institute for Sustainable Investing published Sustainable Reality: Analyzing Risk and Returns of Sustainable Funds 
in 2019. The Institute “compared the return and risk performance of ESG-focused mutual and exchange-traded funds (ETFs), as defined by Morningstar, against traditional counterparts from 2004 to 2018, using total returns and downside deviation.” It found that that there is “no financial trade-off in the returns of sustainable funds compared to traditional funds, and they demonstrate lower downside risk.” Moreover, during a period of extreme volatility, the study found “strong statistical evidence that sustainable funds are more stable.”

In 2017, Nuveen TIAA Investments released Responsible Investing: Delivering Competitive Performance. After assessing the leading SRI equity indexes over the long term, the firm “found no statistical difference in returns compared to broad market benchmarks, suggesting the absence of any systematic performance penalty. Moreover, incorporating environmental, social and governance criteria in security selection did not entail additional risk.” It added that SRI indexes had similar risk profiles to their broad market counterparts, based on Sharpe ratios and standard deviation measures.

The Global Impact Investing Network (GIIN) and Cambridge Associates co-produced a report in 2017, The Financial Performance of Real Assets Impact Investments. After analyzing 55 real assets, including timber, real estate and infrastructure, the authors concluded that “risk-adjusted market rates of return are achievable in impact investing, as evidenced by the fact that the distribution of impact investing fund returns mirrors the distribution of conventional real asset fund returns…” The report explains the importance of fund selection because of the wide variation in individual fund returns.

Sustainable Investing and Bond Returns is a 2016 report by Barclays Research. To study the link between ESG incorporation and corporate bond performance, the team constructed broadly diversified portfolios tracking the Bloomberg Barclays US Investment-Grade Corporate Bond Index. They matched the index’s key characteristics but applied either a positive or negative tilt to different ESG factors. Barclays Research found that “…a positive ESG tilt resulted in a small but steady performance advantage…” They did not find evidence of negative performance. 

In 2015, Deutsche Asset & Wealth Management and Hamburg University published an article titled ESG and Financial Performance: Aggregated Evidence From More Than 2,000 Empirical Studies. The team conducted a meta-analysis of over 2,000 empirical studies since the 1970s, making it the most comprehensive review of academic research on this topic. They found that the majority of studies show positive findings between ESG and corporate financial performance (CFP). “The results show that the business case for ESG investing is empirically very well founded. Roughly 90% of studies find a nonnegative ESG–CFP relation. More importantly, the large majority of studies reports positive findings. We highlight that the positive ESG impact on CFP appears stable over time.” 

From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance is a 2015 meta-study conducted by Oxford University and Arabesque Partners, which categorized more than 200 sources, including academic studies, industry reports, newspaper articles and books. According to their results, "88 percent of reviewed sources find that companies with robust sustainability practices demonstrate better operational performance, which ultimately translates into cash flows." Furthermore, "80 percent of the reviewed studies demonstrate that prudent sustainability practices have a positive influence on investment performance."

In 2015, the Global Impact Investing Network (GIIN) and Cambridge Associates jointly published the report Introducing the Impact Investing Benchmark. The Cambridge Associates Impact Investing Benchmark includes over 50 private investment funds of vintage years 1998 to 2010 that have the specific objective to create positive, measurable social impact and to produce risk-adjusted, market-rate financial returns. Cambridge Associates measured the Impact Investing Benchmark against a comparative universe of 705 funds with no social impact objective in the same industries, geographies and asset classes and of the same vintage years. According to their analysis, "private impact funds—specifically private equity and venture capital funds—that pursue social impact objectives have recorded financial returns in line with a comparative universe of funds that only pursue financial returns." The "funds in the Impact Investing Benchmark posted an IRR [internal rate of return] of 6.9 percent as of June 30, 2014, while a comparative universe of private investment funds with no social impact objectives and with the same vintage years returned 8.1 percent." Additionally, "US-focused impact investing funds under $100 million returned a 13.1 percent pooled net IRR versus a 3.6 percent IRR for comparative US funds under $100 million."

How and Why SRI Performance Differs from Conventional Strategies, a 2014 report by Envestnet | PMC investigated the differences in SRI and non-SRI domestic equity mutual fund performance. It analyzed average (mean) performance and also compared total and risk-adjusted returns at points on distributions away from the means. Among its findings, it found that "SRI and non-SRI fund performances are nearly identical at the mean, supporting the conclusion by SRI proponents that, on average, socially conscious investing does 'no harm' relative to unconstrained, conventional investing."

Sustainable Investing: Establishing Long-Term Value and Performance, a 2012 meta-analysis by DB Climate Change Advisors of more than 100 academic studies, finds that incorporating environmental, social and governance data in investment analysis is “correlated with superior risk-adjusted returns at a securities level” and that SRI approaches that merely employ exclusionary screens, while showing little upside, do not underperform.
In November 2009, Mercer issued a report, Shedding Light on Responsible Investment: Approaches, Returns and Impacts, in which it reviewed a further 16 academic studies on SRI and financial performance that were published after the 2007 UNEP FI review. It found that of these 36 studies, published between 1995 and 2009, 20—more than half—found evidence of a positive relationship between ESG factors and financial performance, and only three found evidence of a negative relationship. It concluded that “a variety of factors, such as manager skill, investment style and time period, is integral to how ESG factors translate into investment performance; therefore, it is not a ‘given’ that taking ESG factors into account will have a uniform impact on portfolio performance, and we expect significant variation across industries.” 

In October 2007, the Demystifying Responsible Investment Performance report issued by the United Nations Environment Programme Finance Initiative (UNEP FI) analyzed 20 influential pieces of academic work and 10 key broker studies exploring links between different approaches to responsible investment and investment performance. This comprehensive review found that SRI investment strategies are competitive with non-SRI strategies from a performance standpoint.