Sustainable Investing Performing Strongly in 2016

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With interest growing in sustainable investing, it's great to see the positive financial performance of many of the funds following suit.

Concerns about socially responsible investing underperforming financially are somewhat well-grounded based on the history of negative screening. 

For example, this study by investment consultant Wilshire Associates accounts for the Billions of Dollars lost by CalPERS over time due to divestment from sectors such as tobacco.

Sustainable Investing

Fiduciary duty laws combined with perceptions of possibly leaving such returns on the table have led many to look the other way from sustainable investment options.

Fortunately, at a time when valuations are high, sustainable investing has done even better financially.

The S&P 500 was up a little over 1% during the first half of 2016 and varied during these past few months at being under for the year, or flat, or as it ended up just over at +1.28%, and keep in mind this is before any management fees are applied by any fund manager or broker.

The largest public-facing sustainable mutual fund in the US, by far, in terms of assets, is the Parnassus Core Equity Fund now managing over $13B in assets, and this fund was +3.34% for these same past 6 months for a very nice outperformance of 206 basis points.

At Brown University, we started working with Parnassus in the newly launched Brown University Sustainable Investment Fund which has a goal of financially outperforming while finding the best environmental and social opportunities, so it's great to see Parnassus continue to perform strongly.

As of July 23, 2016, as well, the final 5 stocks we isolated as a class as great sustainable investments both financially and from a sustainability perspective and which are: 

  • Hannon Armstrong
  • Xylem
  • Alphabet
  • 3M
  • Applied Materials

5 Sustainable Companies

These 5 companies are up +18.27% as an equally weighted portfolio, versus the S&P 500 +7.9% since mid-March when these were first suggested and voted on by our students. 

We had written previously here about Parnassus, a Bay Area-based investment firm, which has been financially outperforming while most active managers have been largely underperforming their benchmarks. In fact, only 15% of large-cap value funds are beating their benchmarks over the past year.

A high bar is set for sustainable investing, but through intelligent application of ESG with expertise and proper strategy, financial outperformance is possible and can be tried for and achieved when most other similar strategies without sustainability applied are struggling.

Another Parnassus fund, Endeavour, was the financially outperforming sustainable investment fund of the past 10 years, beating its benchmarks, and Parnassus as a whole now manages something like $15 Billion up from less than $1 Billion back in 2007.

Also performing strongly is the TIAA-CREF Social Choice Fund, which is the second largest public-facing fund of its kind at roughly $2.7 Billion in assets, but represents over $16 Billion of assets when you include private accounts, so arguably this the largest of all sustainable investing funds, perhaps globally, of any such managed portfolio. 

This type of strong financial performance figures to only accelerate interest in the field. Other studies showing the financial outperformance of issues such as board gender diversity also helps increase consumer interest.

What Increased Stability Means

The implications start to become not factoring ESG as increasingly risky if not ill-advised, especially when you consider, for example, the likely permanent lower price of oil. Just investing as if business as usual will continue is not sensible, especially if through diversification into sustainability alone, you have the chance of capturing the wild positive runs enjoyed by companies such as Tesla Motors, whereas if you do not diversify, you miss out by definition.

The strongest financial performers per this link maintained by Bloomberg are the Calvert Long-Term Income Fund (+11.8% for A Share investors) and Calvert Global Water Fund (+10.78% for A Share investors). These sorts of very strong indications of financial performance across asset class implies that investors need to look not only at equity funds but also other categories of investing such as bonds, infrastructure and private equity, which can be harder for the average person to access but that could be a big opportunity for such smaller specialist firms.

Keep in mind that earnings are shifting dramatically by sector. As per this previous FactSet link, energy company earnings fell 77% year over year, a very large fall, also reflective of global shifts in energy efficiency and consumption patterns in addition to the increased supply we experienced recently in the US.

Sustainable Investing becomes not only a hedge against these trends but also a way of finding Alpha, in some ways for the first time, but we should also be mindful of the ten-year outperformance of Generation Investment Management, as with Parnassus, showing that Value investors factoring in sustainability have been doing well for a while now.

In our Brown class, as mentioned, we found Hannon Armstrong and Xylem to be two of our very best choices, and they are up +22% and +23% respectively since they were selected for our class portfolio.

These renewable energy and water infrastructure companies respectively were our best presentations, combining a sustainability and a financial/business case, and these companies are run carefully and conservatively, not trying to get ahead of themselves.

Underperforming Investment Funds

Contrast that to the underperforming sustainable investment fund of the first half of 2016, theCalvert Global Energy Solutions Fund, down 7.9% for A Share investors during this peroid. This fund clearly made less effective bets on the renewable energy sector as per this recent factsheet.

BlackRock originally had a similar negative experience when it ran Europe's New Energy Fund, then Europe's largest sustainable fund, but whose performance has turned around recently and which is now a 4 star Morningstar fund. Parnassus maintains its 5 star status, Calvert is more of a mixed bag.

On a fund by fund basis, even within a single financial institution, there can be outperformance or poor performance for sustainable investing strategies, but with sustainability and expertise applied there no longer should be a blanket assumption that returns are being left on the table.

Conversely, the largest and most sophisticated funds are outperforming now, and with issues such as financial inequality in the West, the rising middle class in Asia and overarching issues such as climate change on the horizon, diversifying into sustainable investing that is thoughtful and proven figures to be a smart way forward. 

Concerns on the quality of ESG data also remain and actually grow louder by the day, so passive investments have lagged in success as well. Sustainable Investing is not an easy button proposition when companies work on new strategies such as the driverless car, mostly in secret, so getting to know companies is critically important.

This argues against indexing, rather sustainable investing can now be seen as the salvaging of active investing more generally. How's that for an ironic twist of sorts - sustainable investing has become a key opportunity for the financial services sector and may well save their businesses entirely.