Biggest Misconceptions of Sustainable Investing

Sustainable investing accounts for over a third of the world’s assets, yet people are still skeptical 

There are a lot of misconceptions out there about sustainable investing and its potential returns. For example, many people believe sustainable funds underperform compared to traditional investments, however, the data and evidence show this simply isn’t true. Here are some of the most common myths about sustainable investment returns debunked:

Myth 1: Sustainable funds underperform the market 

This is one of the biggest myths about sustainable investment returns. The truth is, sustainable funds have performed just as well if not better than traditional funds over the long-term. According to a 2023 report by Morgan Stanley, sustainable funds across asset classes met and beat their traditional fund counterparts on a total return basis over the last 7 years, with an average annual return of 8.9% for sustainable funds compared to 7.5% for traditional funds.

The idea that sustainable funds underperform their traditional counterparts has led many investors to believe that sustainable investing means accepting lower returns on their investments. However, numerous studies have shown no statistical difference in returns between sustainable and traditional investments over the long run. A comprehensive review by the NYU Stern Center for Sustainable Business looked at 200 different sources and found 88% of studies showed strong Environmental, Social, and Governance (ESG) practices actually led to higher returns, with an annual average return of 6.9% for high ESG performers compared to 2.9% for low ESG performers.

Myth 2: Sustainable investing is just a fad

With $35.3 trillion in assets globally now being professionally managed under sustainable investing strategies, it’s clear sustainable investing is much more than a passing trend. Sustainable investing has gone fully mainstream, meeting increased demand from investors who want their money invested in companies making a positive impact. From 2018 to 2020 alone, global sustainable fund assets grew at a rate of 15% per year.

Myth 3: Sustainable funds are too risky for investment returns

Sustainable funds invest in companies managing environmental, social, and governance (ESG) risks effectively. This proactive approach to risk management can actually make sustainable investments lower risk over time compared to funds ignoring ESG factors. A study by MSCI found companies with high ESG ratings experienced 20% lower costs of capital and 16% higher operational performance, leading to higher returns.

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