Morgan Stanley

Morgan Stanley Sustainable Reality Report Reveals U.S. Sustainable Funds Outperformed Traditional Funds by 4.3 Percentage Points in 2020

Feb 24, 2021

  • U.S. sustainable equity funds outperformed traditional peer funds by a median of 4.3 percentage points ‒ the largest difference in performance recorded since 2004 ‒ in a year marked by uncertainty amid the global pandemic
  • The results of the study further highlight the potential for better risk-adjusted returns from sustainable funds, especially in times of severe market volatility

New York - 

Sustainable investing funds outperformed traditional funds and reduced investment risk throughout 2020, according to a new Sustainable Reality study published today by the Morgan Stanley Institute for Sustainable Investing (The Institute). This analysis of U.S. equity and taxable bond funds found that sustainable funds weathered the severe market volatility throughout 2020 better than their traditional counterparts, indicating that sustainable funds are more reliable in times of stress.

Key Findings

In 2020:

  • U.S. sustainable equity and taxable bond funds continued to outperform their traditional fund counterparts on a total return basis throughout 2020
    • Median total return for U.S. sustainable equity funds was 4.3 percentage points higher than traditional funds
    • Median total return for U.S. sustainable taxable bond funds was 0.9 percentage points higher than traditional taxable bond funds
  • U.S. sustainable equity and taxable bond funds also continued to be less risky than their traditional counterparts as measured by median downside deviation
    • U.S. sustainable equity funds’ median downside deviation was 3.1 percentage points less than traditional peer funds
    • U.S. sustainable bond funds’ median downside deviation was 0.4 percentage points less than traditional peer funds

“The difficult events of 2020 underscored the importance of sustainability concerns and strengthened the rationale for sustainable investing,” said Audrey Choi, Morgan Stanley’s Chief Sustainability Officer and CEO of the Institute for Sustainable Investing. “Sustainable funds’ strong risk and return performance during an exceptionally turbulent year further erodes the persistent misconception that sustainable investing requires a performance sacrifice.”

These findings build on the Institute’s 2020 report, which found that sustainable funds weathered the COVID-19 pandemic better than their traditional counterparts during first half of 2020. The Institute has analyzed sustainable and traditional funds’ performance since 2004, and in any given year during the 2004-2018 evaluation period, sustainable funds performed in line with traditional counterparts but provided more downside protection, especially in times of volatility.1

“The U.S. sustainable investing market ended the year on a high note, with record-breaking net inflows in October, November and December,”2 said Matthew Slovik, Managing Director and Head of Global Sustainable Finance at Morgan Stanley. “Amid this continued growth, analyzing the performance of sustainable investments, and proving their resiliency, is critical to advance the field and to encourage others to invest with an ESG mindset.”

These findings were compared to the Institute’s 2019 report, which compared sustainable and traditional funds’ historical risk and return performance from 2004-2018 using Morningstar data. Institute analysts applied the same methodology to evaluate the performance of U.S.-domiciled sustainable funds investing in U.S. equities and taxable bonds active in 2020 against their traditional peers when the coronavirus pandemic induced significant volatility in the capital markets.

To read more about the Morgan Stanley Sustainable Realities paper and the findings, please visit the Morgan Stanley Institute for Sustainable Investing.

About Morgan Stanley

Morgan Stanley (NYSE: MS) is a leading global financial services firm providing investment banking, securities, wealth management and investment management services. With offices in more than 41 countries, the Firm's employees serve clients worldwide including corporations, governments, institutions and individuals. For more information about Morgan Stanley, please visit www.morganstanley.com.

About the Institute for Sustainable Investing

The Morgan Stanley Institute for Sustainable Investing (The Institute) builds scalable finance solutions that seek to deliver competitive financial returns while driving positive environmental and social impact. Founded in 2013, The Institute creates innovative financial products, thoughtful insights and capacity building programs that help maximize capital to create a more sustainable future. For more information about the Morgan Stanley Institute for Sustainable Investing, visit www.morganstanley.com/sustainableinvesting.

Disclosures

This has been prepared for informational purposes only, and is not a solicitation of any offer to buy or sell any security or other financial instrument, or to participate in any trading strategy. This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Securities discussed in this report may not be appropriate for all investors. It should not be assumed that the securities transactions or holdings discussed were or will be profitable. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor.

Past performance is not a guarantee or indicative of future performance. Historical data shown represents past performance and does not guarantee comparable future results.

This material contains forward-looking statements and there can be no guarantee that they will come to pass.

Information contained in this material is based on data from multiple sources and Morgan Stanley makes no representation as to the accuracy or completeness of data from sources outside of Morgan Stanley.

The returns on a portfolio consisting primarily of Environmental, Social and Governance (“ESG”) aware investments may be lower or higher than a portfolio that is more diversified or where decisions are based solely on investment considerations. Because ESG criteria exclude some investments, investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria.

Diversification does not guarantee a profit or protect against loss in a declining financial market.

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An investment in an exchange-traded fund involves risks similar to those of investing in a broadly based portfolio of equity securities traded on exchange in the relevant securities market, such as market fluctuations caused by such factors as economic and political developments, changes in interest rates and perceived trends in stock prices. The investment return and principal value of ETF investments will fluctuate, so that an investor’s ETF shares, if or when sold, may be worth more or less than the original cost.

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Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.

Fixed Income investing entails credit risks and interest rate risks. When interest rates rise, bond prices generally fall. Fixed income investments are advantageous in a time of low inflation, but do not protect investors in a time of rising inflation. Interest income on government securities is subject to federal income taxes, but exempt from taxes at the state and local level.

Bond funds and bond holdings have the same interest rate, inflation and credit risks that are associated with the underlying bonds owned by the funds. The return of principal in bond funds, and in funds with significant bond holdings, is not guaranteed.

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© 2021 Morgan Stanley & Co. LLC and Morgan Stanley Smith Barney LLC. Members SIPC. All rights reserved. CRC 3460444 02/2021

1 “Sustainable Reality: Analyzing Risk and Returns of Sustainable Funds,” Morgan Stanley, 2019 (https://www.morganstanley.com/content/dam/msdotcom/ideas/sustainable-investing-offers-financial-performance-lowered-risk/Sustainable_Reality_Analyzing_Risk_and_Returns_of_Sustainable_Funds.pdf).

https://www.morningstar.com/articles/1019195/a-broken-record-flows-for-us-sustainable-funds-again-reach-new-heights

Morgan Stanley Media Relations: Katherine Stueber, katherine.stueber@morganstanley.com

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