Debunking the top five sustainable investing myths

Past performance is no guarantee of future returns. It is not possible to invest directly in an index.

One of the most common misbeliefs surrounding sustainable investing is that it generates lower returns. With years of performance data now available, the numbers show that sustainable strategies often perform in line with—or in some cases, outperform—a traditional benchmark.

From April 2014 to March 2024, MSCI ESG Equity Leaders (which focuses on companies with strong ESG scores) delivered higher returns compared to the broader MSCI World Index.

There are two reasons why we have conviction in sustainable investing’s performance:

1. Focusing on material environmental, social and governance—related risk: Extensive data, corporate disclosure and regulatory report on environmental, social, and governance (ESG) issues give investors new insights into how well companies are managing risk. When done right, a focus on key ESG issues can potentially lower investment risk. Financially material ESG factors such as human capital management and land use could have significant effects—both positive and negative—on a company’s business model and value drivers. 
2. Identifying growth-oriented megatrends: Megatrends are powerful influences that can affect the economy and society. A relevant example is the clean energy transition, which includes wind and solar, smart grids and energy storage. Identifying and investing in these megatrends may provide long-term growth opportunities as these trends reshape the market. 

Myth #2: Sustainable investing doesn’t drive real change

Fact: It has, and it can. You can have a voice through active managers and corporate engagement strategies.

Companies often have a global influence, sometimes for the better (e.g., by being a good employer) and sometimes for the worse (e.g., by polluting a local ecosystem). It’s possible to sponsor specific causes through your investments and potentially impact company behavior.

Let’s dive deeper with a real-life case study. An investment manager holds a leading U.S. manufacturer of cement in its sustainable portfolio. However, it is the portfolio’s largest carbon emitter.

Manufacturing construction supplies is a carbon-intensive process. The transformation of calcium carbonate in limestone into calcium oxide is a vital step to produce “clinker”—a component in cement—which is responsible for about 60% of total cement-manufacturing emissions. 

After engagement from the investment manager, the manufacturer has taken steps to decarbonize its operations by:

• Increasing use of alternative fuels
• Reducing clinker content¹
• Employing carbon capture, utilization and storage technology

The manufacturer has a 20% carbon intensity reduction goal by 2030 versus a 2011 baseline. To encourage further change, the manager will continue proposing a new science-based emissions target.²

This is just one example of how sustainable investing can help drive change. By investing in actively managed strategies that engage directly with companies, it’s possible to drive positive change over time.

Myth #3: Sustainable investing is solely focused on climate

Fact: Social and governance factors, in addition to the environment, are critical to sustainable investments.

Climate change and other environmental concerns are a focus for many sustainable investors. However, social and governance issues—the S and G in ESG—are top of mind for clients as well, and they merit consideration in the analysis of companies and funds. Arguably, every investment should focus on the G—sound governance practices are critical to the long-term success of businesses. And social issues such as diversity practices, and employee health and safety are increasingly seen as important in company analysis.

In fact, E, S and G issues are often interrelated. For example, water stress is not only a risk to ecosystems, but it also affects human health and well-being. It can intensify social and political fragilities in emerging economies, such as the Middle East and North Africa (MENAT), the most water-scarce region in the world. Greater societal stresses can also lead to forced migration across borders. Further, many of these types of environmental risks have been found to disproportionally affect lower-income communities, women and girls.

Myth #4: Sustainable investing is a passing fad

Fact: Sustainable assets under management have increased and stabilized—and this growth could continue over time.

Sustainable investing assets have nearly tripled since 2020—and despite market volatility, both returns and fund totals have remained stable. 

The above data shows that global assets under management in sustainable funds are around $3 trillion as of March 2024. These assets have grown at a 27% compound annual rate over the past four years. 

We expect this growth will continue due to several factors, including:

• Shifting investor preferences, particularly among Gen Z and millennials, who prioritize sustainable practices³
• Growth in corporate net zero pledges⁴
• Policy and regulatory changes, such as the Sustainable Finance Disclosure Regulation (SFDR) in Europe⁵
• Macro tailwinds, such as the clean energy transition and sustainable technology, which require up to $5 trillion in spending per year and may create continual long-term investment opportunities⁶

Myth #5: I can only apply sustainable investing to a part of my portfolio

Fact: There are sustainable investment options that span asset classes and objectives.

As sustainable investing continues gaining traction, there are many different strategies and asset classes that can be used across a portfolio. 

A total of 153 new sustainable funds have launched since 2022,⁷ spanning across equities, fixed income and alternative vehicles. There are even sustainable products that focus on specific themes or megatrends, such as healthcare, climate or inclusivity.

Sustainable investing is also more accessible than ever. Investments minimums have gotten lower over time, allowing for more portfolio flexibility and incremental allocations.⁸

We can help

Sustainable investing offers unique opportunities to better align a portfolio with personal goals beyond just financial returns. Contact your J.P. Morgan team to learn more about our different approaches to sustainability and how you can get started.

¹Clinker is a byproduct of cement production. For every tonne of clinker produced, nearly a tonne of CO2 is emitted, making it responsible for 90% of concrete’s carbon footprint, https://www.ecocemglobal.com/en-us/our-company/the-future-of-cement/

²All case studies are shown for illustrative purposes only and are hypothetical.

³Deloitte, “2024 Gen Z and Millennial Survey” (2024).

⁴Net Zero Tracker, October 2023.

⁵European Union, “Sustainability-related disclosure in the financial services sector” (2024).

⁶JPMorganChase and Jamie Dimon, “Chairman and CEO Letter to Shareholders” (April 2024).

⁷Morningstar, “What Are Sustainable Funds and How Have They Performed?” (February 2024).

⁸J.P. Morgan Private Bank, “Sustainable Investing” (2024).