Sustainable funds outperform peers in 2020

Insights from the Morgan Stanley Institute for Sustainable Investing

04/01/21

Summary: Sustainable funds outperformed traditional peer funds and reduced investment risk during coronavirus in 2020, according to the Morgan Stanley Institute for Sustainable Investing

In a year of extremes brought on by the pandemic, 2020 encapsulated wild market movements. It started with a steep drop in markets last March, followed by a global recession and months of severe market volatility that ultimately ended with rising markets. Sustainable funds, which focus on environmental, social and governance (ESG) factors, across both stocks and bonds, weathered the year better than non-ESG portfolios, according to the Morgan Stanley Institute for Sustainable Investing.

An analysis of more than 3,000 US mutual funds and exchange-traded funds (ETFs) shows that sustainable equity funds outperformed their traditional peer funds and had less downside risk in 2020. Let’s break down key findings:


Sustainable funds outperformed non-ESG peer funds:1

  • US sustainable equity funds outperformed their traditional peer funds by a median total return of 4.3%.
  • US sustainable bond funds outperformed their traditional peer funds by a median total return of 0.9%.

Sustainable funds proved less risky than non-ESG peer funds:1

  • US sustainable equity funds’ median downside deviation was 3.1% less than traditional peer funds.
  • US sustainable taxable bond funds’ median downside deviation was 0.4% less than traditional peer funds.
Chart - 2020 Median Total Returns

In fact, a longer time horizon shows similar results. During 2019, sustainable equity funds outpaced traditional peer funds by a median of 2.8%, while sustainable taxable bond funds outperformed their traditional peer funds by a median of 0.8%.2 In any given year from 2004 through 2018, sustainable funds' median total returns were in line with that of traditional counterparts and provided more downside risk protection, especially during periods of increased market volatility, according to a recent Institute report.3

“Sustainable investments have continued to perform well throughout 2020, reinforcing the value of sustainable investing and further dispelling the myth that investors who include sustainability considerations in their portfolios face a financial trade-off,” says Audrey Choi, Chief Sustainability Officer at Morgan Stanley and CEO of the Institute for Sustainable Investing.

The rise of sustainable investing

Sustainable investing is becoming more widely accepted among individual investors and asset managers who see potential for sustainable portfolios to yield attractive financial returns, alongside positive environmental or social impact.

At the start of 2020, 1-in-3 dollars under professional management in the US—around $17.1 trillion—employed a sustainable investing strategy, a 42% increase since 2018.4

About half of individual investors have adopted sustainable investing, according to a recent report by the Institute.5 Evolving regulations are also pushing companies to disclose more information about their sustainability practices, giving investors more data to measure ESG risks and opportunities.

US sustainable-investing-fund inflows accelerated in the fourth quarter of 2020. Investors allocated $20.5 billion over the final three months of the year, more than doubling the previous quarterly record set in 2019.6

In analyzing differences between portfolio compositions of sustainable equity funds and their traditional counterparts, the Institute found that in 2019, sustainable funds on average held stocks with larger market capitalizations, and more shares in companies considered growth stocks. These sustainable funds also had lower carbon risk, a measure of exposure to companies with high greenhouse-gas-emission profiles, according to the Institute's September report.2

Bottom line: Sustainable investments may help deliver higher potential returns with less downside risk than non-ESG focused funds, reinforcing the idea that it’s possible to do well while investing in good.

  1. The source of this Morgan Stanley article, Sustainable Funds Outperform Peers in 2020 During Coronavirus, was originally published on February 24, 2021.
  2. Morgan Stanley Institute for Sustainable Investing, “Sustainable Reality: 2020 Update,” https://www.morganstanley.com/content/dam/msdotcom/en/assets/pdfs/3190436-20-09-15_Sustainable-Reality-2020-update_Final-Revised.pdf
  3. Morgan Stanley Institute for Sustainable Investing, “Sustainable Investing’s Competitive Advantages,” 8/6/19, https://www.morganstanley.com/ideas/sustainable-investing-competitive-advantages
  4. US SIF Report on US Sustainable and Impact Investing Trends – 2020; https://www.ussif.org/files/US%20SIF%20Trends%20Report%202020%20Executive%20Summary.pdf
  5. Morgan Stanley Institute for Sustainable Investing, “2019 Sustainable Signals: Individual Investor Interest Driven by Impact, Conviction and Choice,” https://www.morganstanley.com/pub/content/dam/msdotcom/infographics/sustainable-investing/Sustainable_Signals_Individual_Investor_White_Paper_Final.pdf
  6. https://www.morningstar.com/articles/1019195/a-broken-record-flows-for-us-sustainable-funds-again-reach-new-heights

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