Why Sustainable Investors Should Stay the Course
Your portfolio may be struggling now, but it’s still helping generate positive ESG outcomes.
In late February I wrote that a long-term commitment to sustainability can help investors weather short-term market turmoil. Two months later, as we near bear-market territory, that message bears repeating.
At the end of April, the S&P 500 was down more than 13% for the year. Large-cap growth stocks had declined 29%. With many sustainable equity funds tilted in that stylistic direction, sustainable fund investors are bearing the brunt of this downturn. And because so many have only recently invested in sustainable funds, this is their first encounter with poor performance.
As a sustainable investor, what should you do now? Stay focused on why you are a sustainable investor. Your investments reflect a commitment to seek both competitive long-term returns and positive environmental, social, and corporate governance outcomes. Assuming you have a diversified portfolio designed to meet your long-term financial needs, you should remain invested for that reason alone. Trying to time the market is a crapshoot.
Meanwhile, take note of the fact that sustainable investors continue to successfully engage with companies on improving their sustainability performance and to support ESG-related shareholder questions at company meetings. Significant outcomes on climate-risk disclosure, racial audits, and plastics and packaging have occurred already in this year’s proxy season, for example. Whether directly pressured by investors or not, more and more public companies are embracing the idea of improving their ESG performance, if not the bigger idea of moving toward a business model that focuses on creating value for all stakeholders. This trend will continue despite current market conditions. Your investment returns may be struggling today, but your portfolio is still helping create positive ESG outcomes.
Keep this in mind, too: While sustainable investing includes a range of specific approaches, no sustainable fund is going to outperform all the time. The long-term thesis remains that, on balance, companies that embed sustainability into their operations, human capital, and governance will prosper more than those that don’t as we move through the first half of the century. So will companies that create actual products and services that are aligned with the transition to a more-sustainable low-carbon economy.
That’s a thesis—not a guarantee of superior investment performance. Some companies will prosper despite being ESG laggards or offering unsustainable products. And for investors, valuations come into play. A sustainable fund that buys a stock when it’s undervalued and sells before it gets too pricey will outperform one that pays no attention to valuations and focuses only on holding ESG leaders or the producers of sustainable products.
In the end, if you have a well-diversified portfolio, sustainable or not, and stay the course in difficult markets, it’s likely to generate competitive long-term returns for you. But having that additional sustainability connection with your portfolio should give you even more confidence to stay the course.
As Morningstar’s Don Phillips wrote recently, by forging that connection, sustainable investing is performing a “valuable social good—helping improve the long-term finances of a new generation of investors by not forcing a divide between their financial and social or environmental goals.”
Are sustainable investors staying the course? The macro-level answer appears to be yes, based on our fund-flows data. For the ninth consecutive quarter, U.S. sustainable fund flows topped $10 billion in 2022′s first quarter. While that was a 26% decline compared with the fourth quarter of 2021, flows into the overall U.S. funds market dipped by 65%. Total assets in sustainable funds declined 4% in the first quarter, but total assets in the overall U.S. funds market dropped 6%. Sustainable funds thus showed greater resilience compared with the overall U.S funds market.
Here are some of the successes sustainable investors have achieved so far in this year’s proxy season:
For more on this year’s proxy season, see Leslie Norton’s interview with the stewardship director of Sustainalytics (a Morningstar Company), Jackie Cook.
Jon Hale does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.