Sometimes it takes more to be good than just not being bad.
That’s the logic behind a shift within the surging sustainable-investing market. For years, the default way to invest responsibly was simply to ignore the companies and industries that some find distasteful, such as tobacco companies or casino operators. That’s still the world’s most popular approach, based on total dollars, but a more nuanced approach to sustainable investing is growing more quickly.
Instead of barring a list of industries from consideration, more mutual funds are taking into account how well companies do on environmental, social and governance issues. Does the company have a history of emitting a lot of carbon dioxide? Does it pay its executives excessively?
Managers of so-called ESG-integrated funds consider the answers alongside more traditional measures, such as how much profit a company makes and how quickly it’s growing. Adding that layer of questioning is a way to reduce risk for long-term investments, proponents say, in part because companies that score well on ESG issues are less likely to blow up in scandals or face big regulatory fines.
Sustainable investing in general is surging. Assets in the category leapt to $21.4 trillion worldwide at the start of 2014 from $13.3 trillion two years earlier, according to the Global Sustainable Investment Alliance. It’s growing faster than the overall market and represents 30.2 percent of all professionally managed assets.
Under the sustainable umbrella, ESG-integrated investing is providing some of the fastest growth. Its assets more than doubled from 2012 to 2014, hitting $12.9 trillion, and demand has been so strong that new ESG mutual funds are being rolled out seemingly every month.
Consider the Matthews Asia ESG fund, which launched April 30. It focuses on Asian stocks, and its lead manager, Vivek Tanneeru, says the region is ripe for an ESG approach given environmental concerns in the region and the rapid ascendance of many families out of poverty.
Banks in India that target women and low-income customers are not only helping on social issues, for example, they’re also delving into big, profitable markets. Tanneeru emphasizes that finding companies with strong financial prospects remains his priority and that considering ESG issues comes later in the process. That’s because many of these ESG-integrated funds want investors to be able to depend on them as core holdings, rather than as just nice side investments.
The influx of new funds means that many don’t have a track record. But a recent study by the Morgan Stanley Institute for Sustainable Investing found that investors interested in sustainable funds generally don’t have to sacrifice returns.
After looking at the performance of 10,228 mutual funds over seven years, the institute found sustainable stock funds posted returns that were as good or better than the median traditional fund in nearly two-thirds of time periods measured.
Nicholas Kaiser, chief investment officer of Saturna Capital, opened its Sustainable Equity fund and Sustainable Bond fund in late March after seeing demand rising for responsible investment through the Amana mutual funds that it manages.