Sustainable investing, also known as responsible investing, is an investment strategy that focuses on generating long-term financial returns while also taking into consideration environmental, social, and governance (ESG) factors. As individuals and organizations become more aware of the impact their investments can have on the world, sustainable investing is witnessing rapid growth. This month, we’re exploring why.
1. Investor Demand
More and more individuals and institutions are looking to align their investments with their values and make a positive impact on the world. According to a 2024 report by Morgan Stanley, more than half of individual investors say they plan to increase their allocations to sustainable investments in the next year, while more than 70% believe strong ESG practices can lead to higher returns. This growing demand shows that investors are becoming more conscious of the social and environmental implications of their investments and are seeking opportunities that not only provide financial returns but also contribute to a sustainable future.
2. Proven Outperformance
Another key reason for sustainable investing’s surge in popularity is the strong financial performance it offers. Investors no longer need to choose between their principles and their pocketbooks. Today, sustainable investments have proven time and again that they can deliver competitive financial returns while also making a positive impact on the world.
Numerous studies have shown that companies with strong ESG practices tend to outperform their peers in terms of profitability and long-term value creation. For instance, Morgan Stanley’s Sustainable Reality report looked at sustainable fund performance from January 1, 2023 through December 31, 2023 and found that, overall, sustainable funds returned +12.6% compared with traditional funds which returned +8.6%. This significant outperformance is part of a long-term trend of sustainable funds outperforming traditional funds. This is due in part to the fact that sustainable companies are often better equipped to identify and manage risks, adapt to changing market dynamics, and attract and retain top talent. As a result, investors are increasingly recognizing the potential for higher returns and reduced risk that sustainable investing offers.
3. Consumer Value Shifts
As societal awareness regarding environmental issues increases, so does the demand for sustainable products and services. Consumers are becoming increasingly conscious about the impact their purchasing decisions have on the planet and are extending this awareness to their investment choices as well.
Consumers no longer see investments solely as vehicles for financial gain but also as tools to promote positive change. As a result, consumer value shifts towards sustainability have created a compelling market for sustainable investing. By aligning their investments with their values, individuals have the opportunity to make a difference while earning returns.
4.Increasing ESG Regulation
As we mentioned last month when talking about the top ESG trends, increasing ESG regulation has been a hot topic this year. Climate legislation such as the European Union’s Corporate Sustainability Reporting Directive (CSRD) affects more than just EU-based companies and will standardize ESG practices worldwide. For example, the recently adopted European Sustainability Reporting Standards, effective since January, will have worldwide ramifications for many international companies with operations within the European Union.
Similarly, the SEC has been considering the incorporation of sustainability factors into its regulatory framework, and adopted rules to enhance and standardize public companies’ climate-related disclosures. With increasing regulation, standardization, and transparency, investors can now access more reliable and standardized ESG information when evaluating potential investments, further fueling growth of more informed investment decisions aligned with their sustainability goals.
5. Positive Environmental Impact
As global awareness about climate change and environmental degradation continues to increase, it comes as no surprise that sustainable investing is on the rise. Investors are recognizing the importance of considering the impact of their investments on the environment and society, alongside financial returns.
By investing in companies that prioritize sustainability and actively work towards reducing their carbon footprint, conserving resources, and promoting clean energy, investors can contribute to the preservation of our planet for future generations. Sustainable investing allows individuals to align their financial goals with their environmental values, enabling them to actively participate in the transition towards a more sustainable and greener economy.
At EGÉA SRI, we specialize in helping individuals invest responsibly, tailoring investments to our customers values. Contact us today for a consultation and let us help you grow your portfolio sustainably!
