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Debunking five myths about sustainable investing


Like many important trends, sustainable investing has spurred both excitement and confusion, for some in roughly equal measure. Misconceptions about the nature, purpose and even the definition of sustainable investing have taken hold, and it’s sometimes hard to find the signal in the noise.

We’ll tackle these misconceptions one by one. But first, we’ll define our terms.

At J.P. Morgan, “sustainable investing” is an umbrella term used to describe investment approaches that incorporate financial as well as social and environmental objectives.

We believe in the power of investing to drive both sustainable long-term growth and positive impact.

The incorporation of sustainability factors in the investment process can help deliver enhanced, risk-adjusted returns over the long run, and can also help integrate investors’ values and missions with their financial objectives.

 

MYTH #1

Sustainable Investing equates to lower performance.

No.

Sustainable investing does not require a performance tradeoff. If we look at environmental, social and governance (ESG) integration as an example, research shows that incorporating ESG factors can enhance a portfolio’s returns by reducing volatility and providing protection in bear markets (Exhibit 1). Think of it this way: Embedding ESG analysis leads to more complete and robust data to analyze companies, and more data can lead to betterinformed investment decisions and, potentially, stronger risk-adjusted returns. In that sense, sustainable investing can actually lead to value creation.

Further, we see environmental and social issues as secular, long-term “megatrends” that can potentially offer attractive investment opportunities. Some of these megatrends include investments in clean energy, electric vehicles and new technologies that increase agricultural yield in water-scarce areas.

Exhibit 1 ESG leaders have produced strong performance

Source: Morningstar 5/1/10 - 4/30/20. ESG Equity Leaders = MSCI ACWI ESG Leaders NR USD Index, which invests in the top 50% of MSCI ESG rated companies, Broad Equity Index = MSCI ACWI NR USD Index. See Index Definitions under Important Information.

Past performance is not a guarantee of future results. It is not possible to invest directly in an index.

MYTH #2

Sustainable investing means excluding securities from my portfolio, and therefore reducing my opportunity set.

Not at all.

Exclusionary screening is just one sustainable investing approach; there are several other approaches that proactively select sustainability leaders, rather than focus on removing securities. These include: ESG Integration: ESG issues are part of investment due diligence and financial analysis. Thematic Investing: Targets specific social and environmental issues. Impact Investing: Investments are made in companies, organizations and funds to generate positive social and/or environmental impact alongside financial return (Exhibit 2).

Many ESG strategies utilize shareholder advocacy and engagement as key components of their investment approaches‒rather than divest from a holding, an investor or manager may use their “voice” as a shareholder to influence a decision.

Exhibit 2 Exclusionary screening is still a common approach, but other strategies are gaining significant traction

Source: Global Sustainable Investment Alliance, “2018 Global Sustainable Investment Review,” April 2, 2019. Asset values are expressed in USD billions. Eurosif categories have been grouped as follows: Exclusionary Screening: Exclusions; ESG Integration: Engagement and Voting, ESG Integration; Positive Screening: Norms-Based Screening, Best-in-Class; Thematic Investing: Sustainability Themed; and Impact Investing: Impact Investing. ‘CAGR’ stands for Compound Annual Growth Rate.

MYTH #3

Sustainable investing is solely focused on climate and the environment.

Not really.

Climate change and other environmental concerns are a focus for many sustainable investors and also integral in several of the investment solutions at J.P. Morgan Private Bank. 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 (Exhibit 3). 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 data security, employee health and safety, and diversity practices are increasingly seen as important in company analysis.

We also find that 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 (MENA), the most water-scarce region in the world.¹ 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. Given the interconnectedness of ESG issues, our sustainable investing solutions consider a wide range of sectors and themes, including the environment, health and wellness, poverty and diversity.

Exhibit 3: Sample key ESG issues

1 J.P. Morgan: Climate Changes Everything, Part II.

MYTH #4

Sustainable investing is just a passing fad.

We don’t think so.

In a recent survey, 87% of millennial respondents noted the importance of ESG factors when they make investment decisions.² However, that shouldn’t overshadow the wide range of investors contributing to the growth of ESG assets. According to Schroeder’s 2019 Global Investor Study, which surveyed 25,000 investors worldwide, more than 60% of respondents under age 71 said that all investment funds should consider sustainability factors when making investment decisions.

At the end of 2014, there were just 111 sustainable investing mutual funds and ETFs in the public markets. By year-end 2019, that number had grown to 303 funds, including 106 passive options and 77 exchange-traded funds (ETFs).³ Flows into U.S. sustainable funds increased four-fold from 2018 to 2019, growing by $21.4 billion in dollar terms (Exhibit 4). In Europe, flows into sustainable strategies were EUR 120 billion4 in 2019, and AUM stood at EUR 668 billion across 2405 funds.

Exhibit 4 Sustainable fund flows set a record in 2019

Source: Morningstar Research, “Sustainable Funds U.S. Landscape Report,” February 2020.

2 U.S. Trust, “2018 Insights on Wealth and Worth.”
3 Morningstar Research, “Sustainable Funds U.S. Landscape Report.” February 2020.
4 Morningstar Research, “European Sustainable Fund Flows: A Record-Shattering Year.” January 2020.

MYTH #5

Sustainable investing is expensive, and requires a large asset base.

Certainly not.

Although institutional investors account for 75% of global ESG investments, retail-based investment has been growing more quickly5. There are a growing number of sustainable investing funds, and many carry small minimums. Investor demand for less expensive funds and ETFs is driving flows and shaping asset growth. In the last four years, passive funds and ETFs have accounted for at least 40% of new launches, and now constitute about a third of total sustainable funds in the United States6 (Exhibit 5). The entry of large players, coupled with the explosive growth in passive fund and ETF options for ESG investing, have pushed fees down. Asset-weighted ESG ETF expense ratios dropped from 0.27% in 2018 to 0.21% in 2019 in the United States.7

Exhibit 5 Universe of sustainable funds continued its multiyear growth trend in the United States

Source: Morningstar Direct. Data as of December 31, 2019.

5 Global Sustainable Investment Alliance, “2018 Global Sustainable Investment Review.”
6 Morningstar Research, “Sustainable Funds U.S. Landscape Report.” February 2020.
7 FactSet Insights, “ETF Fee War Hits ESG and Active Management.” January 2020.



 

 

 

 

We take a global approach to sustainable investing and the solutions offered through our Sustainable Investing Platform meet our internally defined criteria for a sustainable investment. Though we consider our internal criteria to be very thorough and selective, the evolving nature of sustainable finance regulations and the development of jurisdiction-specific legislation setting out the regulatory criteria for a “sustainable investment” mean that there is likely to be, in future, a degree of divergence as to the regulatory meaning of a “sustainable investment”. In particular, in the European Union, the Sustainable Finance Disclosure Regulation (EU) (2019/2088) (“SFDR”) prescribes certain criteria for a product to be classified as “sustainable” or having a “sustainable investment objective”.

IMPORTANT INFORMATION

INDEX DEFINITIONS

Note: Indices are for illustrative purposes only, are not investment products, and may not be considered for direct investment. Indices are an inherently weak predictive or comparative tool. All indices denominated in U.S. dollars unless noted otherwise.

The MSCI ACWI Index is a capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets.

The MSCI ACWI ESG Leaders Index is a capitalization weighted index that provides exposure to developed and emerging market companies with high Environmental, Social and Governance (ESG) performance relative to their sector peers.

This material is for information purposes only, and may inform you of certain products and services offered by J.P. Morgan’s wealth management businesses, part of JPMorgan Chase & Co. (“JPM”). Please read all Important Information.

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While investments in private equity funds provide potential for attractive returns, access to opportunities not available in the public markets and diversification, they also present significant risks, including illiquidity, long-term time horizons, loss of capital and significant execution and operating risks that are not typically present in public equity markets. Private equity funds typically have a 10–15 year term and will begin to monetize investments after holding them for 4–5 years.

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