Sustainable Investing

Sustainable Investing Myth Busters

Interested in Impact Investing but still not sure how it works or if it’s a good idea? These myth busters can help you learn more about the growing investment trend.

Sustainable investing is surging, having enjoyed a 135% increase in assets under management since 2012 to $8.72 trillion, and it’s still growing.

An increasing number of fund managers are now overlaying their investment strategies with environmental, social and governance (ESG) analysis; asset management firms are finding ways to cater to all kinds of Impact Investing demands and innovation continues in the global capital markets to provide new sustainable investment products.

Yet there are still some lingering misconceptions about what sustainable investing is, how it’s done and whether it helps or hurts returns.

Myth 1. Sustainable Investing Means Sacrificing Returns

Reality: Analysis by the Morgan Stanley’s Institute for Sustainable Investing shows that sustainable strategies have often performed in line with or even better than their traditional counterparts.

The Institute conducted a proprietary study in 2015 called Sustainable Reality, which examined seven years’ performance of more than 10,000 mutual funds and 2,800 Separately Managed Accounts.

The results showed that sustainable investments usually met, and often exceeded, the performance of traditional investments. A Harvard study in 2016 also found that firms with good ratings on sustainability issues most relevant to their industries significantly outperformed firms with poor ratings on these issues.

Myth 2. Investing With Impact Is a Niche Area

Reality: Sustainably invested assets now account for more than one out of every five dollars under professional management in the U.S., according to the 2016 report on sustainable and responsible investing trends by the U.S. SIF Foundation.

The SIF Foundation’s data show that sustainably invested assets now account for 22% of all invested assets under professional management in the U.S.

Myth 3. Sustainable Investing Products are Limited

Reality: In 2016, 1,002 distinct funds, representing $2.6 trillion in assets, incorporated ESG criteria into their investment decision-making, up from $1.01 trillion in 2012. Morgan Stanley’s Investing with Impact framework details the full spectrum of approaches that investors of all sizes can pursue in their portfolio. There is now even a private equity fund of funds being offered.

Increasingly, traditional investment strategies are incorporating ESG analysis to help steer clear of potential blowups in the stock markets when companies violate ESG regulations.

Myth 4. You Have to Be a Millionaire to Invest Sustainably

Reality: Millennials are democratizing sustainable investing. According to findings from the Institute in 2015, 84% of millennials — broadly defined as those born between the early 1980s and 2000 — say they are interested in socially responsible investing. Millennials are also twice as likely to invest in a stock or a fund if it targets specific environmental or social outcomes.

New Bonds Make It Easy To Be Green

Green bond offerings are growing in the sustainable investment space, nixing the idea that stocks are the only game in town.

Sustainable investing may have been dominated by stocks in the past, but that may be changing as the green bond market continues to become more attractive to both retail and institutional investors. This trend is helping to grow the range of approaches to sustainable investing in the broader fixed income space.

New issuance of green bonds has ballooned over the past few years. Last year, green bond issuance exceeded $47 billion with new offerings in France, Sweden, Germany, China, and India, among others. Compare that to just three years ago, when green bond issuance was just over $10 billion.1

Meanwhile, the overall appetite for sustainable investment products and strategies has grown markedly and now accounts for over $6.57 trillion of assets managed in the United States2 and $21.4 trillion globally.3

As investors become more focused on sustainable investing, green bonds are joining equity-based investments as part of a comprehensive approach to integrating sustainability in their portfolios.

What Is a Green Bond?

Green bonds are fixed income securities for which the proceeds will be used for projects with clearly mandated environmental benefits. The projects typically involve renewable energy, energy efficiency, sustainable land use and clean water.

While similar to traditional bonds in terms of structure and maturity, green bonds are subject to more stringent disclosure requirements regarding use of proceeds and expected impact during specific time horizons.

Since green bonds are backed by the full credit of the underlying issuer, returns are not dependent upon the success of any one particular venture and therefore investors are not subject to project risk. Given that the risk profile of green bonds is in line with that of traditional offerings from the issuer, they will typically trade at identical or very similar valuations.

Green Bond Issuers Evolve

Historically, the green bond market has been driven by supranational development organizations, including the World Bank and International Finance Corporation (IFC), and they continue to be the most active issuers. The World Bank alone has issued over $8.5 billion in green bonds in 18 currencies since 2008. However, corporations, municipalities and government agencies are now becoming important issuers.

Corporations have been increasingly drawn to green bonds to support sustainability initiatives and clean energy projects. A 2014 Standard & Poor’s report found that “corporate issuers see green bonds as an alternative financing avenue, offering access to a diversified investor base, plus a means of implementing and maintaining efficiency measures considered environmentally sustainable.”4

The municipal market also lends itself particularly well to green bonds. State and local governments consistently tap capital markets to borrow money for projects designed to positively impact the lives of residents, such as building schools and hospitals. Looking ahead, a broad swath of issuers is primed to increase green bond issuance, allowing access to a diversified investor pool and greater efficiency.

All Investors Welcome

While equity-based strategies may have lead the way, green bonds will play an increasingly important role as investors take a more holistic, portfolio-based approach to sustainable investing. The emergence of green bonds serves as a prime example of the evolving market landscape and points to a future where attractive financial returns and positive societal and environmental outcomes can happen simultaneously.