Finance Is Fine!

Green Investment Management Pushing For Higher Sustainable Investment Returns

The S&P 500 had a rip-roaring year in 2019. The stock index benchmark returned 31.5 percent over the year, more than double its 10-year average of 13.5 percent. Indisputably impressive performance. But the 100 most sustainable companies did even better, returning 34.3 percent to shareholders. The world's best corporate citizens are earning higher returns for investors. Moreover, sustainable companies that practice responsible environment, social, and governance (ESG) management are steadily increasing this performance lead.

Green investment management is increasing its influence over corporate sustainability practices with the addition of its newest member. The world's largest asset manager BlackRock, with $6.8 trillion in assets under management, has joined the Climate Action 100+ initiative. The aim of the 370 investors with $41 trillion in assets is to use their clout to ensure companies representing two-thirds of annual global industrial emissions take action to reduce their emissions. To encourage compliance, each green investing company applies ESG screens when deciding whether to invest in a company.

In return, sustainable investors are rewarded with higher returns. Companies with the best ESG practices have higher operating performance because they're focused on long-term results rather than short-term investment gains. When a green investment company demands better environmental, social, and governance behavior from companies, it is forcing the company to improve efficiencies, and consequently costs. 

According to Corporate Knights, which has its own Global 100 Corporate Knights Index, sustainable companies generate more revenues from products with high positive environment and social impacts, as well as do better on carbon productivity, CEO pay, and the percentage of women on boards. One key area of focus of green investment management is energy usage, since companies comprise 65 percent of global energy consumption. Companies on the Corporate Knights Global 100 index generated an impressive $230K in revenue for each ton of CO2 produced compared to $157K for those on the MSCI ACWI (All Country World Index). In other words, these companies are using cleaner and less energy, and as a result reducing energy costs.

This sustainable investment advantage is improving. The MSCI World ESG Universal index has generated a five-year annual return of 3.73% versus 3.25% for the MSCI World Index. On a 10-year basis, the ESG outperformed its parent benchmark by only .08 percent, showing that sustainable investments are increasing their performance lead. Notably, the ESG index has a slightly lower Beta, because sustainable companies operate more conservatively. Therefore, investors assume lower risk for each dollar of return.