Generating Sustainable Returns

Sustainable investments have seen a surge of interest in recent years, as awareness grows about the impact Environmental, Social and Governance (ESG) factors can have on a portfolio.

Institutional investors are increasingly taking the view that it is part of their fiduciary responsibility to take full consideration of ESG risks, and many investors of all types are realizing that employing sustainable investment approaches could generate better risk-adjusted returns in the long-term. Many investors are also taking the view that they have a broader responsibility to consider the impact of their investments.

This trend for investors choosing sustainable investment from ESG-integrated to impact and thematic focused options is now well-established, with sustainable funds attracting record flows across the world in recent years:

Growth of sustainable investing assets under management between 2014 and 2018

Source: April 2018 Global Sustainable Investment Review by the Global Sustainable Investment Alliance.

Sustainability is a Global Story

Investors looking to tap in to the growing trend for sustainable investing should ensure that their portfolios can allocate globally, as many of the best opportunities for sustainable investment can be found outside North America, according to Morningstar’s Sustainability Atlas:

Morningstar Country Indexes' Portfolio Sustainability Scores

Source: Morningstar Direct. Data as of August 31, 2019.

Sustainable Investing Approaches

In response to increasing interest, a wide spectrum of sustainable investing approaches and products have developed, ranging from mainstream investment management teams beginning to consider environmental, social and governance (ESG) issues as part of their investment processes to highly specialized 100% impact groups.

ESG Integration

Combines ESG data, research and analysis together with traditional financial analytics in the investment decision-making process. May not explicitly exclude investment in undesirable countries, companies, etc.

Thematic and Impact Investing

Invests in sustainable businesses that are related to and likely to benefit from specific themes (i.e., energy efficiency, green infrastructure, clean fuels, low-carbon transportation infrastructure) or to generate a measurable, beneficial social and environmental impact alongside a financial return.

Exclusionary Screening

Excludes companies, sectors, or countries based on ethical, moral or religious beliefs.