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Explained: Is sustainable investing profitable?

In short, yes. A number of financial factors have made sustainable investing very attractive and increasingly popular in the recent decade.

Let’s dive into why this is.

What is sustainable investing?

Sustainable investment is the practice of investors seeking only to invest in companies with a degree of social responsibility. This is indicated by an ESG (environmental, social and governance) rating.

An ESG rating measures the company’s sustainability level.

In other words, it shows how well protected the company is from non-financial risks relating to the environment and society.

Sustainable investing includes a range of investment strategies. They seek to deliver competitive financial returns in the long run. At the same time, they’re driving positive environmental outcomes and social impact.

In other words, it is investing that focuses not only on profits but on people, the planet, and profits.

Not all sustainability funds are built equal. It’s crucial to look beyond the label of “sustainability” and understand different sustainable investing strategies. This way, you can make sure that your investments are really driving the impact you’re looking for.

Read about Grünfin’s sustainable investing principles to understand how we screen for impact.

Am I giving up on future performance?

One of the main concerns for investors is if they’re sacrificing performance for profit.

The answer is no.

The performance of sustainable investment funds equals conventional funds.

An analysis by the Morgan Stanley Institute for Sustainable Investing took a look at 3000 US mutual funds and exchange-traded funds (ETFs). Their results: sustainable equity funds outperformed traditional peer funds by a median total return of 4.3 percentage points in 2020.

During the same period, sustainable taxable bond funds beat their non-ESG counterparts by a median total return of 0.9 percentage points.

There is no evidence that sustainable investors underperform or outperform regular investors for similar types of investments. In fact, data points to the opposite.

There are more reports of sustainable funds showing better performance over the long term.

An analysis by the Morgan Stanley Institute for Sustainable Investing of 3000 US mutual funds and exchange-traded funds (ETFs) found them to be on par or overperforming traditional funds.

A MorningStar analysis found that most sustainable funds that existed ten years ago and still exist today did better than their average surviving traditional peers.

Another MorningStar analysis looked at environmental, social, and governance-tilted index funds. 24 of 26 of them outperformed their closest non-ESG counterparts in the first quarter of 2020 during the COVID-19 crisis.

Why does sustainable investing make sense?

A lot of companies face challenges related to climate change and the transition to a carbon-neutral economy.

Sustainable investing manages risks and focuses on the opportunities that come with the transition.

For example, the rapid development of renewable energy or the circular economy.

If a company scores high on ESG, it can mean a number of positive things. It will likely provide good stakeholder service, tackle environmental challenges, have conservative balance sheets and avoid general risk. All of these factors make companies with high ESG-scores more resilient during market downturns.

Doing the right thing

For many of Grünfin’s customers, the good performance of ethical investing choices is a bonus. The main thing they care about is doing the right thing.

There may still be people out there that don’t focus on impact in their investment strategy. It’s reassuring to know that the profitability of sustainable funds encourages them to make investments that benefit the planet.

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Interested in Grünfin’s approach to sustainable investing? Read about our investing principles.