For years advisors have been told that sustainable funds can help align investments with client preferences without forfeiting profits. Now there’s growing evidence that those funds can actually deliver better returns than other more traditional funds.
A recent report in Barron’s found that 37% of large-cap U.S. stock funds with “above average” or “high” sustainability scores in Morningstar’s database outperformed the S&P 500 index — which has an “average” sustainability rating — compared with just 28% of conventional large-cap funds.
Barron’s analyzed 203 funds that had more than $300 million in assets each, ranking them by performance for the 12 months ended Sept. 30. Seventy-six funds outperformed the S&P 500 index. A similar analysis by Barron’s last year found that 25% of comparable sustainable funds beat the index compared with 12% for large-cap U.S. stock funds.
Morningstar data also finds that many sustainable funds perform better than expected. Within its universe, 38% of sustainable funds have either four or five star ratings while 23% rate one or two stars, when both numbers should be close to 33% based on expected distributions, according to an analysis by Jon Hale, head of sustainability research.
“Sustainable investing is simply smart investing,” reads the lead sentence on the section of BlackRock’s website dedicated to the topic.
BlackRock, State Street and Morgan Stanley are among a growing number of financial firms offering investment products that focus on sustainable investing, calling on corporations to disclose their ESG (environmental, social and governance) practices and opposing corporate managers who don’t in their proxy votes.