Anum Siddiqui: Sustainable investing has become an increasingly popular topic of discussion for investors. Despite its uptake, one of the biggest obstacles has been the perception that sustainable investing has a negative impact on investment performance. However, multiple research findings show that this is not necessarily the case.
Historically, sustainable investing was practically synonymous with socially responsible investing. SRI typically involves screening out securities. But research has shown that SRI exclusion may put a drag on returns. In particular, excluding so-called sin stocks, such alcohol tobacco and gambling, can have a negative impact, as these stocks have higher expected returns and can be more attractive from a risk-adjusted return perspective.
But sustainable investing has evolved from the SRI exclusionary approach, and now more commonly involves the incorporation of environmental, social and governance factors into a fund's investment process. Studies have shown the positive impact of ESG inclusion on performance, showing that stocks and portfolios of better ESG profiles have outperformed and exhibited lower levels of risks.
There are many ways in which fund managers can incorporate their ESG factors into their investment process. But ultimately, rather than screening out stocks, ESG inclusion is primarily based on how sustainable a company is, as sustainable business practices can lead to a lower cost of capital, better operational performance and superior stock price returns. Overall, sustainable investing does not necessarily mean that you have to sacrifice performance.
