Investing responsibly is the way of the future

The pandemic has given a boost to the “responsible investing” movement and shown that companies that score high on sustainability are more likely to be better positioned for long-term growth.

SUSTAINABLE investing, depicted by some as a trade-off between profit and moral ideals, is increasingly demonstrating that one needn’t sacrifice returns when investing with these ideals in mind.

This is not to say that investing in sustainable companies will always yield higher returns, but it does suggest that the trade-off is narrowing.

Behind this kind of thinking is the realisation that sustainabilityrelated events on a global scale, such as climate-related disasters or pandemics, are an everpresent consideration, affecting all companies.

According to a report by investment bank Morgan Stanley, during the market volatility brought on by the onset of the coronavirus pandemic in 2020, companies that focused on environmental, social and governance (ESG) factors weathered the year better than their non-ESG peers.

The report, which surveyed more than 3 000 US mutual and exchange-traded funds, showed that sustainable equity funds – those that invest in companies that rate highly on ESG factors – outperformed their traditional peers by a median total return of 4.3% last year. Before the onset of the pandemic, in 2019, sustainable equity funds outpaced traditional peer funds by a median of 2.8 percentage points. In any given year from 2004 through to 2018 they say, sustainable funds' median total returns were in line with that of traditional counterparts and provided more protection against capital loss, especially during periods of increased market volatility. "There are an increasing number of studies proving that the performance of investments using an ESG framework as being on par and sometimes better than traditional agnostic investing," says Famida Singh, Liberty's Divisional Executive for Retail Investment Propositions. "A number of factors influence this. The consideration of ESG and the desire for long-term sustainability are at the forefront of many quality businesses globally. These companies have adopted and invested in sustainability drives in an effort to contribute to socioeconomic benefits and positive impacts on the climate. These companies have aligned their business models and sustainable investment philosophies and are delivering quality returns to shareholders," she says.

Top stocks in the US with leading ESG ratings now include companies such as Microsoft and 3M. "This rise in awareness has been driven by a number of factors, including increased legislation and the ongoing heightening of awareness and action from investors, asset owners and managers, industry bodies and other stakeholders.

And the worldwide need to address climate change is obviously another factor," says Jeanne Fourie, Liberty Lead Specialist for Sustainability. "The screening of investments for exposure to specific factors such as child labour or illegal practices may lead to the exclusion of certain investments, and many fund managers will now include a list of exclusions as part of their process. Some funds will go as far as explicitly outlining these exclusions in the fund mandate or objective.

"As the concept of responsible investing has developed over time, fund managers are actively playing a role in considering ESG factors in their investment decision making," Fourie says.

Singh believes investors should see ESG with a long-term lens: "We think the companies of the future are the ones that are taking care to protect the future. This is why some of our investment portfolios offer clients the opportunity to invest in companies that fit into our broader view of creating a sustainable future."

It has also become clear that a growing number of millennial investors are likely to expect a well formulated ESG approach by asset managers.

This may include the use of artificial intelligence and alternative data extraction techniques, which can reduce reliance on voluntary disclosure by companies on ESG criteria. "The best investment approach is an informed, evolutionary one. ESG continues to evolve, and in all probability something like the Covid pandemic, for example, will in itself influence the nature of ESG standards. In all fairness, it's work in progress, but the desired end result does suggest a very real financial reward for embracing these commitments," Singh says. Supplied by Liberty