The truth about sustainable investing

Apr 22, 2021
  • Anna Hawley, CFA

There is a common misconception that selecting investments with consideration of a company’s environmental, social and governance business practices consequently produces lower returns. We asked systematic active equity portfolio manager Anna Hawley to clear the air.

Are investors in sustainable strategies forfeiting some degree of performance?

Absolutely not. Sustainable investing focuses on companies that are managed in a way that is mindful of the long view and thus have the potential to deliver long-term portfolio returns. It combines traditional investment analysis with the additional lens of environmental, social and governance (ESG) insights to provide portfolio managers a more complete view of the long-term risks and opportunities associated with a company.

ESG insights allow us to better understand a company’s relationships with all of its stakeholders – shareholders, customers, employees and the community – and its ability to adapt and thrive as the world changes. For example, a company’s carbon output, workforce diversity and R&D investments can tell us about its priorities and preparedness for the future.

The performance benefits of evaluating sustainable opportunities are quantifiable and undeniable. Yet, not all investors recognize this. I think the confusion stems from the way sustainable investing evolved in the United States. Back in the 1990s, portfolio managers would screen out companies or sectors based on a client’s personal values (think tobacco, weapon manufacturers, etc.), and this often resulted in underperformance of the portfolio versus its benchmark. This practice, known as “screened investing,” still exists, but it is not the mainstream form of sustainable investing.

The performance benefits of evaluating sustainable opportunities are quantifiable and undeniable.

Sustainable investing today is centered around using ESG insights to uncover risks and opportunities that would not be detected with traditional investment analysis alone. Active ESG fund managers dynamically allocate capital toward companies that we believe are well-positioned to benefit from their own past investments. For example, this might include companies that have built a happy workforce with diverse skills, or companies holding patents that are critical for electric vehicle technology.

ESG data substantiates ideas that were previously supported only by common sense. Companies that maintain positive relationships with the environment and society are less likely to deliver disappointing investment returns due to lawsuits, negative headlines or an unproductive workforce. To the contrary, they are more likely to adapt and grow with our evolving economy.

How can ESG strategies seek to improve portfolio performance?

As an active equity team, we target consistent outperformance for investors. As ESG investors, we go beyond traditional investment analytics to dig deeper into a company’s risks and opportunities.

I first witnessed the return implications of management quality back in 2002, when I began my career in the equity research group. This was long before the industry coined the terms “ESG” or “sustainable investing.” My job was to look through companies’ financial statements for evidence of aggressive accounting practices that could lead to negative surprises. Where I detected a risk, quite often I’d see that company’s stock price fall with their next quarterly earnings announcement.

Fast forward to 2013 – we started looking at new sources of data and discovering insights that couldn’t be gleaned from a company’s financial statements. As we analyzed more ESG-related data, we quickly realized that there’s much more to this than a number, or “ESG score.” These are truly unique insights that we found to be meaningfully correlated to a company’s efficiency or profitability measures. The value of this research came as a bit of a surprise to us at first but led to a broader body of work that has become part of the fabric of what my team does.

Today there is a wider range of ESG data from which we can derive insights, providing a more holistic view of a company’s risks and opportunities. We can better predict the return implications of emerging trends and potential future events, and lean into areas of strength. Adding sustainable metrics to our investment process improves our ability to seek long-term outperformance through forward-looking opportunities and better-informed risk management.

What do you view as the big opportunity today?

The universe of ESG data has increased exponentially in recent years and it’s still expanding. We are finding more intriguing investment opportunities as the emergence of new data sources provides richer insights about the environment and society and how companies are interacting and evolving with them.

For example, we can look at shifts in carbon output across the country, or the pace at which electric vehicle grids are being built. At the same time, more companies are recognizing the importance of disclosing their policies and activity relating to ESG, which helps us see how these companies are preparing for the future. Much of this insight, in our view, is not fully reflected in stock prices, presenting a myriad of opportunities in the market today.

Moreover, as ESG data continues to improve, we are able to complement our traditional investment analysis with an increasing variety of information that can’t be found in a company’s financial statements, enabling us to find new and more holistic ways to predict company fundamentals. That’s what makes ESG strategies such a unique opportunity for long-term performance, which thus far appears to be underappreciated by investors.

What is your long-term outlook for sustainable investments?

Sustainable investing is in its infancy and I believe it’s here to stay. Financial advisors are asking for more education around sustainable investing and we have the data to show them how these strategies can improve their portfolio return potential. The growing field of ESG data and research is bringing about a proliferation of new sustainable investment products, and demand has been growing rapidly. Global investment in sustainable assets has nearly tripled in the past four years.

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*Source: Simfund, Broadridge and Bloomberg. Assets under management as of December 31, 2020. U.S. sustainable mutual funds represented by Morningstar “Sustainable Investment – Overall” category; data provided by Simfund. Non-U.S. sustainable mutual funds represented by Broadridge “Responsible Investment” categories; data provided by Broadridge. Global sustainable ETFs are determined by BlackRock; data provided by Bloomberg. Excludes funds of funds and closed-end funds.

Additionally, as economies continue to evolve toward more sustainable outcomes, such as carbon neutrality, the application of ESG data in security analysis will become increasingly important to identify potential winners across markets and sectors. In other words, the ability to forecast which companies will be able to adapt and evolve with global economic transitions will be increasingly valuable for investors.

How do you incorporate ESG insights into the Advantage ESG U.S. Equity Fund?

We use proprietary data collection and research techniques to uncover insights, and then we evaluate those insights within a framework we call the “double bottom line.” This framework seeks to answer two questions:

  • Does this insight have a positive relationship with society?
  • Do we expect it to be additive to returns?

Using this framework, we focus on ESG insights that could lead to both better societal outcomes and higher future stock returns. For example, companies that offer better benefits to their employees tend to have lower future employee turnover and higher earnings growth – both benefits to the company and its shareholders. For society, better employee benefits typically result in healthier employees and healthier children. Conversely, we find that reducing benefits predicts future business challenges and lower growth.

Our double-bottom line framework is at the heart of our strategy. We have investment professionals around the world using it to evaluate ESG insights and project future performance potential. It helps us find the companies that are proactively innovating to position themselves for continued growth as the economy evolves.

As sustainable strategies continue to gain traction with investors, and the world progresses toward its sustainability goals such as a net-zero emissions economy, we expect to see a greater performance dispersion across ESG managers, with a clear bifurcation between those who rely mostly upon backward-looking analysis versus those who focus on forward-looking risks and return potential.

Please note, the fund's ESG investment strategy limits the types and number of investment opportunities available to the fund and, as a result, the fund may underperform other funds that do not have an ESG focus. The fund's ESG investment strategy may result in the fund investing in securities or industry sectors that underperform the market as a whole or underperform other funds screened for ESG standards.

To obtain more information on the fund, including the Morningstar time period ratings and standardized average annual total returns as of the most recent calendar quarter and current month-end, please visit :

Advantage ESG U.S. Equity Fund.

The Morningstar Rating^TM^ for funds, or "star rating," is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.