Sustainable investing sentiment weathers economic uncertainty
The Morgan Stanley Institute for Sustainable Investing03/24/22
Summary: Despite economic uncertainty during COVID-19, individual investor interest in sustainable investing reached new heights in some demographics.
For sustainability investors, COVID-19 offered a catastrophic reminder of the need to prepare for large-scale threats. The worldwide public health crisis claimed millions of lives, crippled economies, and disrupted every aspect of daily life. It also brought into stark focus other systemic vulnerabilities, such as climate change, socio-economic inequality, and the proliferation of plastic pollution.
Indeed, a strong majority of individual investors—79%—expressed interest in sustainable investing, in the wake of economic uncertainty and market volatility during the pandemic, a report from the Morgan Stanley Institute for Sustainable Investing shows. Millennial investor interest rose by four percentage points to an all-time high of 99%. The report—which surveyed 800 US individual investors who are 18 years and older with minimum investable assets of $100,000—also showed investors’ desire to align their thematic priorities with current events. Demand surged to support public health, small businesses, and racial and social justice issues.1
To be sure, demand for sustainable investing—which targets environmental and social impact alongside market-rate returns—waned by a small margin since 2019, when the previous survey was conducted and 85% of investors proclaimed their interest. The gap highlights an opportunity to educate investors about the historical returns of sustainable funds in different market environments and the prospect of setting long-term goals apart from financial performance.
Interest in sustainable investing
“As economies begin to emerge from the volatility of the pandemic, sustainable investing continues to show its mettle by empowering investors to make more informed decisions that allow them to align their investments with their desire for impact while mitigating concerns around performance,” says Audrey Choi, CEO of the Institute for Sustainable Investing and Chief Sustainability Officer at Morgan Stanley.
Sustainable investing: A financial tradeoff?
The report shows that 70% of individual investors believe sustainable investing requires a financial tradeoff, an increase from 64% in 2019. This stands in contrast to performance data; Institute analysis shows that sustainable US equity funds outperformed traditional peer funds by a median total return of 4.3 percentage points in 2020, and that sustainable US taxable bond funds beat their non-sustainability counterparts by a median total return of 0.9 percentage points in the same period.
Sustainable vs. traditional US equity funds
Source: Sustainable Reality, Morgan Stanley Institute for Sustainable Investing*
Despite Millennials’ overall strong interest in sustainable investing, 83% of investors who are 25 to 38 years old believe that sustainable investing requires a financial performance tradeoff, more than any other age group. Indeed, concern about returns remains the biggest barrier to sustainable investing cited by all investors, followed by concerns about “greenwashing,” in which organizations mislead consumers through marketing about their positive environmental impact, and a lack of tools to measure their dollars’ impact.
Barriers to sustainable investing
*New question as of 2021
Despite these concerns, 80% of investors believe that companies with strong environmental, social and governance (ESG) practices can generate higher returns and make better long-term investments. The dichotomy suggests that investors may benefit from better education about the historical financial performance of sustainable investments.
Sustainable investing themes
Drilling down into sustainable investing themes, demand grew for investments targeting COVID-19 responses and the environment. Public health was the most common thematic priority, at 82%, more than climate change, plastic-waste reduction, and community development. When investors were asked specifically about how COVID-19 changed their appetite to address sustainability themes through investing, they expressed an increased interest in supporting public health and small businesses, while 50% of investors and nearly 75% of Millennial investors said they made, or plan to make, investment changes in response to social justice movements.
COVID-19 drives shift in investors’ thematic interests
Plastic waste garnered more interest than any other environmental theme—similar to survey results from 2019—including climate change, though the latter remains a top focus, especially for Millennials and investors with a positive economic outlook. Eighty-eight percent of Millennials and 93% of all individual investors who believe the economy is strong expressed interest in climate-themed investments, compared with 74% of all investors.
2021 Sustainable Signals survey results at a glance
The source of this article, Sustainable Investing Sentiment Weathers Economic Uncertainty, was originally published on October 27, 2021.
- "Sustainable Signals: Individual Investors and the COVID-19 Pandemic,” Morgan Stanley, 2021 (https://www.morganstanley.com/assets/pdfs/2021-Sustainable_Signals_Individual_Investor.pdf).
This article also reflects findings from the Morgan Stanley Institute for Sustainable Investing’s Sustainable Reality reports:
“Sustainable Reality: Analyzing Risk and Returns of Sustainable Funds”, Morgan Stanley, 2019, https://www.morganstanley.com/pub/content/dam/msdotcom/ideas/sustainable-investing-offers-financial-performance-lowered-risk/Sustainable_Reality_Analyzing_Risk_and_Returns_of_Sustainable_Funds.pdf
“Sustainable Reality: 2020 Update”, Morgan Stanley, 2020, https://www.morganstanley.com/content/dam/msdotcom/en/assets/pdfs/3190436-20-09-15_Sustainable-Reality-2020-update_Final-Revised.pdf
“Sustainable Funds Outperform Peers in 2020 During Coronavirus”, Morgan Stanley, 2021 https://www.morganstanley.com/ideas/esg-funds-outperform-peers-coronavirus