The value(s) of sustainable investing

New data show professional investors overwhelmingly believe there is a link between corporate sustainability and long-term financial performance.

Jon Hale 19 July, 2016 | 5:00PM
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What percentage of investors do you think would say that a company's sustainability performance is materially important to their investment decision-making? Even considering the growing interest in sustainable investing around the world, I might have guessed somewhere around one third, assuming that even among those who embrace sustainable investing, some are values-oriented or impact-oriented and just hope to achieve competitive financial benefits from investing that way. Furthermore, I might have guessed that a decent-size group remains altogether skeptical of any connection whatsoever between sustainability and materiality.

Instead, the results were a stunning 90% positive to 10% negative in a recently-released survey conducted by the MIT Sloan Management Review and Boston Consulting Group. Nine in 10 respondents, all professional investors, agreed--at least "to some extent"--with the following statement: "A company's good sustainability performance is materially important for investors when making investment decisions." Taking out those who said "to some extent" still left nearly three fourths (73%) who agreed at least to a "moderate extent." Those who agreed to a "great extent" totalled 43%.

What is interesting about these findings isn't just that 43%, however--it's that an additional 47% also recognizes some connection between company sustainability and materiality, and, at the other end of the spectrum, it's that only 3% disagreed completely with the statement. Even taking into account response bias--the possibility that respondents felt it would be socially incorrect to indicate complete disagreement--these results suggest widespread acceptance of the idea that corporate sustainability performance is connected to financial performance.

When probed for the reasons why investors are making that connection, respondents cited an array of expected outcomes resulting from good corporate sustainability performance. Many of these have some support in the research literature, such as lower costs of capital, better operational performance, lower risk, and effective management. But the most oft-cited outcome, by 82% of respondents, was a company's increased potential for long-term value creation.

This connection between sustainability and a focus on the long term is a hallmark of sustainable investing. Good sustainability performance, generally defined as the effective management of environmental, social, and governance, or ESG, risks and opportunities faced by a business, can be an indicator that a company simply is thinking seriously about the long term, even setting aside the sustainability issues themselves.

We're finding some evidence of a connection between longer-term investing and sustainability performance in our Morningstar Sustainability Ratings for funds. U.S.-based fund managers with longer-term horizons, defined here as those with a portfolio turnover rate of 20% or less, are twice as likely to have the highest Sustainability Ratings than the lowest (although most land somewhere in the middle). A Sustainability Rating of High indicates that the companies held in a fund's portfolio are better managing their ESG risks and opportunities than those held in at least 90% of funds in the same category. Those managers with shorter-term horizons--portfolio turnover of 100% or more--are more likely to have Low Sustainability Ratings than High.

Sustainability Rating (U.S.-based funds) High Low Total Average
Low turnover (20% or less) 85 42 680 3.16
High turnover (100% or more) 65 76 559 2.90
Source: Morningstar Direct. As of April 30, 2016

For many mainstream investors, incorporating sustainability into their personal portfolios is more about aligning their investments with their values and a desire to have some impact on the transition to a more sustainable future. They're sometimes warned away from it by advisors who are under the impression that a performance penalty comes along with sustainable investing. This report suggests, to the contrary, that professional investors overwhelmingly believe corporate sustainability performance is linked to long-term financial performance. Sustainable investing is as much about value as it is about values.

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About Author

Jon Hale

Jon Hale  Jon Hale, Ph.D., CFA, is the head of sustainability research for Morningstar.

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