Today, Sustainable Investing strategies are helping to drive growth and positive societal change in nearly every asset class. Yet misconceptions persist…
Sustainable investing has grown at the breathtaking rate of more than 50% year-over-year since 2019.1
Still, misconceptions about this investment strategy abound. These myth-busting facts will help you see why the Sustainable Investing market is expanding rapidly.
Myth 1: You can’t drive real change through sustainable investing.
Fact: You can have an effect — particularly through active managers with corporate engagement strategies.
Every company affects the world around it – sometimes for the better (e.g., by being a good employer) and sometimes for the worse (e.g., by polluting a local ecosystem).
As an investor, you can intentionally sponsor specific kinds of outcomes through your investments.
For example, you can invest in equity funds that actively partner with companies to change their practices from within. All shareholders have the right to vote for company policies, as well as engage with managers and board members on material issues. If you invest in actively managed funds, they can use your shares to advocate for more sustainable practices. Common themes that sustainable funds advocate for include better climate governance, increased workforce diversity, reduced plastic packaging, improved animal welfare, and stronger data privacy.
In some cases, sustainable funds even push to take board seats so they have a larger voice in governing companies on an ongoing basis.
By investing in actively managed funds that engage directly with companies, you can drive real change through sustainable investing.
Myth 2: You can’t make money from sustainable investing.
Fact: We have seen sustainable investing strategies outperform the market.
Since January 2012 until June 2022, the MSCI ESG Equity Leaders (which focuses on companies with strong ESG scores) have outperformed the broader MSCI World index by 20 basis points (and experienced less volatility during that period as well)..
Past performance is no guarantee of future returns. It is not possible to invest directly in an index
It’s possible to make money from sustainable investing in good times and in bad. Since January 2012 until June 2022, the MSCI ESG Equity Leaders (which focuses on companies with strong ESG scores) have outperformed the broader MSCI World index by 20 basis points (and experienced less volatility during that period as well).1
There are two ways in which Sustainable Investing can help drive financial returns:
- Focusing on material environmental, social, and governance-related (ESG) risk—We live in a new investing reality where more extensive data, corporate disclosure and regulatory reporting on ESG issues give investors new insights into how well companies are managing these components. Done right, a focus on key ESG issues can potentially lower investment risk. Financially material ESG factors (like human capital management) are factors that could have a significant impact -- both positive and negative -- on a company’s business model and value drivers.
- Identifying growth-oriented megatrends—Megatrends are powerful and transformative influences that have an impact on the economy and society. Some examples today include renewable energy like wind and solar, smart grids, and energy storage. Identifying and investing in these megatrends may provide long-term growth as these trends aim to reshape the market.
Myth 3: Sustainable investing is just for activists and environmentalists.
Fact: Sustainable Investing is a broad approach, encompassing diverse motivations and values systems.
Among those who do not invest in sustainable funds today, 31% believe that sustainable investing is strictly for environmentalists and activists2, and they cite that as the key reason they themselves don’t pursue the tactic.
Yet, a far broader swath of the investing public favors SI—and for a variety of reasons2:
- 38% believe it makes good commercial business sense
- 37% believe it represents the future of investing
- 32% believe sustainable investing is likely to improve [their personal] investment performance.
Moreover, as Sustainable Investing continues to deliver strong and resilient financial returns, a broader range of clients has begun adopting this approach. For example, 39% of endowments with more than $1 billion in assets attributes sustainable investing as a source of alpha.3
Indeed, many sustainable investors are driven purely by financial returns. Other proponents are driven by more socially oriented motivations, including a desire to invest in education, healthcare, military veterans, and diversity along with other socially responsible endeavors.
Regardless of your motivations—environmental, financial, and/or social—sustainable investing might be able to help you achieve your objectives.
Myth 4: You need to have a lot of money to sustainably invest.
Fact: Investment minimums for sustainable investing are low and dropping lower.
Historically, sustainable investing was exclusively for the ultra-wealthy (i.e., for investors who could dedicate large allocations and significant staff time to the work required).
That’s changed. Today, minimums to participate in sustainable investing are low and dropping even lower.
This makes the strategy more accessible to a wider audience , including younger investors who want to get started in sustainable investing with small, incremental allocations.
Myth 5: Sustainable investing is all about start-ups.
Fact: Sustainable investing is an approach that you can use to invest in start-ups, mature companies and even government agencies.
Many people hear “sustainable investing” and immediately think of early-stage businesses. Or, they visualize a social enterprise designed to help a particular community or emerging economy.
But that view is too limited.
In reality, Sustainable Investing is a lens that you can apply to a wide range of businesses across sectors and sizes, representing a vast array of investment opportunities. For example:
- Companies of all sizes are working toward a more sustainable future by pursuing opportunities like electric vehicles, regenerative agriculture, and sustainable aviation fuels
- Municipalities are issuing bonds to help fund infrastructure projects to help communities adapt to climate change
- Nonprofits are issuing market-rate bonds to help teachers, firefighters, and veterans finance affordable housing.
Sustainable Investing is a lens that can apply to any investment type.
We can help
To learn more about sustainable investing and the range of Sustainable Investing investments available on our platform, please speak with your J.P. Morgan team.
1Morningstar Direct, as of December 2021. According to Morningstar, sustainable investing has proven to be a durable trend. AUM grew by a record ~$750 billion in 2020—a record that was surpassed in 2021 when Sustainable Investing funds added another ~$950 billion in assets under management.
2JPM Sustainable Investing Research, Q4 2021
32021 NACUBO-TIAA Study of Endowments (NTSE) as of the 2021 fiscal year (July 1, 2020 – June 30, 2021). The data is representative of 720 U.S. colleges and universities.
KEY RISKS
Sustainable investing (“SI”) and investment approaches that incorporate environmental social and governance (“ESG”) objectives may include additional risks. Sustainable Investing strategies, including ESG SMAs, mutual funds and ETFs, may limit the types and number of investment opportunities and, as a result, could underperform other strategies that do not have an ESG or sustainable focus. Certain strategies focused on particular sectors may be more concentrated in particular industries that share common factors and can be subject to similar business risks and regulatory burdens. Investing on the basis of sustainability/ESG criteria can involve qualitative and subjective analysis and there can be no assurance that the methodology utilized, or determinations made, by the investment manager will align with the beliefs or values of the investor. Investment managers can have different approaches to ESG or sustainable investing and can offer strategies that differ from the strategies offered by other investment managers with respect to the same theme or topic. ESG or sustainable investing is not a uniformly defined concept and scores or ratings may vary across data providers that use similar or different screens based on their process for evaluating ESG characteristics. Additionally, when evaluating investments, an investment manager is dependent upon information and data that may be incomplete, inaccurate or unavailable, which could cause the manager to incorrectly assess an investment’s ESG/ Sustainable Investing performance.
J.P. Morgan takes a global approach to sustainable investing and the solutions offered through our sustainable investing platform meet our internally defined criteria for a sustainable investment. The evolving nature of sustainable finance regulations and the development of jurisdiction-specific legislation setting out the regulatory criteria for a “sustainable investment” or “ESG” investment mean that there is likely to be a degree of divergence as to the regulatory meaning of such terms. This is already the case in the European Union where, for example, under the Sustainable Finance Disclosure Regulation (EU) (2019/2088) certain criteria must be satisfied in order for a product to be classified as a “sustainable investment”. Any references to “sustainable investing”, “SI” or “ESG” in this material are intended as references to our internally defined criteria only and not to any jurisdiction-specific regulatory definition.
Investors should understand the potential tax liabilities surrounding a municipal bond purchase. Certain municipal bonds are federally taxed if the holder is subject to alternative minimum tax. Capital gains, if any, are federally taxable. The investor should note that the income from tax-free municipal bond funds may be subject to state and local taxation and the Alternative Minimum Tax (AMT).
