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Adviser Reflections - ESG options now available across all asset classes

“10 years ago, it was difficult to find ethical solutions that suited our clients in fixed interest and property. Equity based solutions were available. But what we’ve seen over the last, let’s say 10 years is ethically screened solutions become available across all the asset classes” Michelle Brisbane.

“A year or so ago, we could finally put hand on heart and say, we can build a properly diversified portfolio across most asset classes with sufficient management, diversification and style to replace the more traditional options we were using up to that point” David Graham.

The lack of consistency in jargon used, and a lack of transparency in data and reporting of investments labelled as ‘green’ or ‘ethical’ may also have deterred some advisers.

But undoubtedly the biggest barrier to adviser uptake – and the one based on the biggest misconception – is that responsible investments come at the cost of lower returns.

Busting the performance myth

Despite the scepticism and remembering that ESG investing is predicated on the consideration of financial – as well as ethical – metrics, the data suggests that responsible investing does not come at the cost of returns. On the contrary, across the responsible investing spectrum, and across different markets and asset classes, responsible investments either match or outperform traditional investments on a risk adjusted basis.

Respected financial ratings and analytics firm Moody’s wrote on February 23, 2021, that, ‘Environmental, social and governance (ESG) themed investments have become one of the best performing investment categories in recent years, paving the way for continued growth of this strategy.’26

A comparison of traditional equity indices and socially responsible investment indices reinforces this point.

The MSCI KLD 400, which was founded as the Domini Social Index, was established in 1990 and consists of 400 companies that meet rigorous standards for environmental excellence and social responsibility. Over the past 30 years, it has tracked performance of these companies against the S&P 500. As can be seen below, the social index has consistently outperformed traditional stocks for the past 25 years. And this gap continues to grow.

FIGURE 3: US INDEX COMPARISONS MSCI KLD 400 V S&P 500

Source: Bloomberg 27

This outperformance has continued, with the KLD index growing 31.6% during 2021, compared to the S&P’s 26.9% annual return28.

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Find out how to invest your client's wealth ethically

References

26

ESG investing is a star. Women are why, Joan Michaelson, forbes.com, March 2021.

27

‘Does impact investing equate to lower returns?’, mycnote.com, April 2020.

28

MSCI KLD 400 Social Index (USD) Fact Sheet, msci.com

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