American sustainable funds outperform the market

SUSTAINABLE INVESTING, once a niche area of interest, has moved into the mainstream. Earlier this month a survey showed that 75% of American asset managers say their firms offer sustainable-investing strategies, which focus on environmental, social and governance (ESG) issues. Almost 90% of fund managers think it is no longer just a fad. Young investors are driving the surge in interest: more than three-quarters of high-net-worth millennial and Generation Z investors have their assets reviewed for ESG impact.

Investing in line with your values is no longer just fashionable, it actually delivers value too. Last year was the worst for American investors since the financial crisis. Data released last week by Morningstar, a data-provider, showed that sustainable American funds outperformed the broader market and recorded their third-consecutive year of record inflows.

Investing with a conscience can improve resilience during market downturns. Morningstar shows that over the past four years sustainable American funds have held their own in ‘up’ markets but outperformed during ‘down’ ones. The funds’ best relative performance was during last year’s rout while the worst was 2017 when the S&P 500 soared by 20%. Recent research by Blackrock, an asset manager, found that companies with a greater ESG emphasis have high-quality and low-volatility characteristics, suggesting they can help act as a buffer during equity-market downturns.

The universe of sustainable funds is expanding. ESG funds used to just exclude ‘sin stocks’ like tobacco companies. Now there is a plethora of asset classes and sectors. One fund focuses on companies that make an impact aligned with the UN Sustainable Development Goals, others in ‘green bonds’ which fund environmental projects. After the Parkland High School mass shootings last year Blackrock launched a fund that offers investors a guns-free passive option.

The argument that ESG funds are more expensive bears less weight than it used to: last year exchange-traded funds, which tend to be cheaper, accounted for around 40% of all net inflows. Sustainable funds currently only make up a tiny proportion of the American market. Millennial desire for do-good investments could mean they are here to stay.