Sustainable stocks. An investment solution with a future.
Interest in sustainable investments is growing worldwide. The reason for this is simple: Such investments are performing well. Particularly in Switzerland and in emerging markets, sustainable stocks are delivering above average returns and sustainable investing promises to remain attractive.
Better performance through sustainable investing
Sustainable investments are a success story. Since the UN formulated the Principles for Responsible Investment (PRI) in 2005, more than 3,000 professional asset managers have become signatories. In total, they manage CHF 100 trillion in assets. The reason for this success is simple: Adopting sustainable quality criteria has helped many companies achieve better performance. The trend is likely to be even more pronounced this year thanks to the strong outperformance of sustainable investments during and after the 2020 stock market crisis.
Sustainable stocks: How performance improves
A look at the historical performance of sustainable investments in the global equity markets shows how much they have developed compared to the market as a whole.
Stocks in developed countries
In the 23 major developed countries, the MSCI World Socially Responsible Investment Index (MSCI World SRI) has outperformed the MSCI World on six occasions over the past decade. Its one percent higher average performance since 2007 explains its long-term outperformance.
Sustainable investments: Stocks in emerging markets
The performance advantage of sustainable investments was even more pronounced in emerging markets. The MSCI Emerging Markets (EM) ESG Leaders Index outperformed the MSCI EM Index in as many as eight of the past ten years. On average, it has gained 5.62% per year since the 2007 financial crisis, more than twice as much as the MSCI EM Index.
Investments in Swiss equities
Sustainable investments are also yielding a better return on the Swiss Exchange. Although the Swiss sustainability index MSCI Switzerland IMI Extended SRI 5% Issuer Capped has only been in existence since 2015, its performance advantage is impressive. In three of the four years, sustainable investments performed better here, and by a clear margin: The index for sustainable Swiss stocks has risen by an average of 8.58% p.a. since 2015. Compared with an increase of "just" 4.69% p.a. in the traditional MSCI Switzerland IMI, the results are clear.
Where does this outperformance by sustainable stocks come from?
The reason for the success of the stocks of companies that meet ESG (environmental, social, and governance) criteria is simple, but perhaps it only becomes apparent on closer inspection. What are known as ESG ratings work in two ways in company analysis:
First, they give a more comprehensive understanding of companies and hence act as an additional risk filter. Second, if you have a comprehensive understanding of companies, you not only avoid more losers, you also identify winners sooner. And the dual secret of the success of sustainability-focused stock selection lies precisely in the systematic application of these two qualities: avoiding long-term losers and building up long-term winners.
What investors need to know about sustainable stocks
Essentially, the better risk-adjusted performance of sustainable investments is the driving force behind the ascendancy of these investments. However, the following points should be borne in mind: First, sustainability criteria only influence the selection of stocks in a portfolio. This accounts for just over 20% of overall performance. In the future too, the main contribution to performance will come from the strategy rather than the selection. That is why choosing a suitable investment strategy and a prudent asset manager and process is and will remain the key to success. Second, the potential for further outperformance by sustainable investments will shrink as their success grows. Because, as soon as all investors are guided by the same indices, the potential for differences falls. But such a situation is still some years away.
- Access to less familiar markets
Thanks to sustainable investments, investors' fears about markets and sectors that are less familiar to them also diminish, for example in emerging markets or sensitive sectors, such as energy or mining.
No less importantly, capital allocation with a focus on sustainability provides a strong incentive for corporate governance that is equally focused on sustainability. The great social potential of the capital markets stems from precisely this power.