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Sustainable Investing: Debunking 5 Common Myths

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Sustainable Investing Infographic

sustainable investing

This infographic is available as a poster.

Sustainable Investing: Debunking 5 Common Myths

It began as a niche desire. Originally, sustainable investing was confined to a subset of investors who wanted their investments to match their values. In recent years, the strategy has grown dramatically: sustainable assets totaled $12 trillion in 2018.

This represents a 38% increase over 2016, with many investors now considering environmental, social, and governance (ESG) factors alongside traditional financial analysis.

Despite the strategy’s growth, lingering misconceptions remain. In today’s infographic from New York Life Investments, we address the five key myths of sustainable investing and shine a light on the realities.

1. Performance

MythReality
Sustainable strategies underperform conventional strategiesSustainable strategies historically match or outperform conventional strategies

In 2015, academics analyzed more than 2,000 studies—and found that in roughly 90% of the studies, companies with strong ESG profiles had equal or better financial performance than their non-ESG counterparts.

A recent ranking of the 100 most sustainable corporations found similar results. Between February 2005 and August 2018, the Global 100 Index made a net investment return of 127.35%, compared to 118.27% for the MSCI All Country World Index (ACWI).

The Global 100 companies show that doing what is good for the world can also be good for financial performance.

Toby Heaps, CEO of Corporate Knights

2. Approach

MythReality
Sustainable investing only involves screening out “sin” stocksPositive approaches that integrate sustainability factors are gaining traction

In modern investing, exclusionary or “screens-based” approaches do play a large role—and tend to avoid stocks or bonds of companies in the following “sin” categories:

  • Alcohol
  • Tobacco
  • Firearms
  • Casinos

However, investment managers are increasingly taking an inclusive approach to sustainability, integrating ESG factors throughout the investment process. ESG integration strategies now total $17.5 trillion in global assets, a 69% increase over the past two years.

3. Longevity

MythReality
Sustainable investing is a passing fadSustainable investing has been around for decades and continues to grow

Over the past decade, sustainable strategies have shown both strong AUM growth and positive asset flows. ESG funds attracted record net flows of nearly $5.5 billion in 2018 despite unfavorable market conditions, and continue to demonstrate strong growth in 2019.

Not only that, the number of sustainable offerings has increased as well. In 2018, Morningstar recognized 351 sustainable funds—a 50% increase over the prior year.

4. Interest

MythReality
Interest in sustainable investing is mostly confined to millennials and womenThere is widespread interest in sustainable strategies, with institutional investors leading the way

Millennials are more likely to factor in sustainability concerns than previous generations. However, institutional investors have adopted sustainable investments more than any other group—accounting for nearly 75% of the managed assets that follow an ESG approach.

In addition, over half of surveyed consumers are “values-driven”, having taken one or more of the following actions with sustainability in mind:

  • Boycotted a brand
  • Sold shares of a company
  • Changed the types of products they used

Women and men are almost equally likely to be motivated by sustainable values, and half of “values-driven” consumers are open to ESG investing.

5. Asset Classes

MythReality
Sustainable investing only works for equitiesSustainable strategies are offered across asset classes

This myth has a basis in history, but other asset classes are increasingly incorporating ESG analysis. For instance, 36% of today’s sustainable investments are in fixed income.

While the number of sustainable equity investments remained unchanged from 2017-2018, fixed-income and alternative assets showed remarkable growth over the same period.

Tapping into the Potential of Sustainable Investing

It’s clear that sustainable investing is not just a buzzword. Instead, this strategy is integral to many portfolios.

By staying informed, advisors and individual investors can take advantage of this growing strategy—and improve both their impact and return potential.

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Infographics

Where Investors Put Their Money in 2019

Fund flows analysis is a useful tool for tracking where investors placed their investments. Let’s see what they were doing prior to the COVID-19 pandemic.

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Where Investors Put Their Money in 2019

While a strong 2019 closed off an entire decade free of recessions, celebrations have been short. The COVID-19 pandemic, which has tapped the brakes on the global economy, has led the International Monetary Fund (IMF) to declare a global recession.

So what were investors doing before the outbreak? To figure that out, today’s infographic from New York Life Investments visualizes where investors allocated their money in 2019.

Broad Comparisons

Virtually every asset class ended 2019 in the green, with U.S. equities among the highest gainers. In spite of this, investors appeared to be quite risk-averse. Even as the S&P 500 climbed 29% over the year, money was pulled away from equities and placed in safer assets such as money market securities and precious metals.

Let’s examine the data in more detail. In the tables below, net flows represents the difference between total inflows and total outflows.

Mutual Funds VS ETFs

Investors continued to invest in ETFs, but the interesting news is surrounding mutual fund activity. In a dramatic reversal from last year’s net outflows of $91B, mutual funds attracted $574B throughout 2019.

Type of Vehicle2018 Net Flows2018 Total Assets2019 Net Flows2019 Total Assets*
ETFs+$238B$3,385B+$281B$4,408B
Mutual Funds-$91B$16,345B+$574B$19,727B

*2019 total assets also include asset appreciation as a result of market movements.

ETFs once again grew their share of total invested assets, from 17.2% in 2018, to 18.3% in 2019.

Flows by Asset Class Group

To get more specific, investment vehicles are classified based on the type of assets they hold.

For example, a fund that holds a variety of American company stocks would be broadly classified as “U.S. Equity,” while a fund that targets specific industries would be classified as “Sector Equity.” Here are the flows each asset class experienced throughout 2019, starting with the largest net inflows:

Asset Class Group2019 Net Flows 2019 Total Assets 
Money Market+$522B$3,483B
Taxable Bonds+$413B$4,433B
Municipal Bonds+$106B$952B
International Equity+$11B$3,416B
Commodities+$8B$110B
Alternatives-$7B$212B
Sector Equity-$33B$995B
Asset Allocation-$38B$1,343B
U.S. Equity-$72B$9,162B

Investors pulled money from asset allocation funds, as well as alternatives, sector equity, and U.S. equity vehicles. Trade tensions between the U.S. and China, which have had a material impact on both countries’ economies, may have been a reason for this conservatism. Other likely factors include the Hong Kong protests and the culmination of Brexit.

In the face of these worrying developments, fixed income vehicles were in high demand, even as the Fed cut rates on three separate occasions. Money market funds had a massive year, and were responsible for much of the investor capital diverted to mutual funds in 2019.

In fact, with a Q3 net inflow of $224B, money market funds saw their strongest quarterly inflows since the global financial crisis.

Deeper Dive: Commodities

One of the most compelling flow trends of 2019 lies in commodities, which we can break down into five subcategories:

Commodities Subcategory2019 Net Flows 
Precious Metals+$11.4B
Industrial Metals-$0.1B
Energy-$0.2B
Broad Basket-$0.8B
Agriculture-$2.2B

Precious metals, which include safe-haven assets like gold and silver, were the only subcategory to see positive net flows in 2019. Likely driven by the fear of inflation, investors flocked to precious metals from June to October.

Gold and silver are often referred to as “safe-haven” assets because they outperform during periods of uncertainty.

The Motley Fool

It’s interesting to note that investors pulled money out of precious metals in November and December—perhaps a sign of growing confidence in the economy.

2020 and Beyond

Due to the ongoing COVID-19 pandemic, volatility has returned to global markets.

While the conservative asset allocation decisions made in 2019 may have given investors some shelter from this turmoil, it’s likely they paid a penalty for missing out on a robust year for equity markets.

In uncertain times like these, it’s important for every long-term investor to keep a cool head. After all, history has shown us that markets will eventually recover.

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How a U.S. Election Could Impact Your Long-Term Investment Goals

Many factors are threatening retirement savings, and a U.S. election could mean more volatility. See how elections have historically affected investments.

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U.S. election performance

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How a U.S. Election Could Impact Your Investment Goals

When constructing a financial plan, it can seem like there are a million things to consider. Your life expectancy, the return needed to reach your goals, and your risk tolerance all play a role. In addition, short-term events like the U.S. election can influence the volatility in your portfolio.

In today’s infographic from New York Life Investments, we outline the factors threatening individuals’ retirement savings, and how a U.S. election has historically impacted investments.

A Precarious Future

In recent years, a variety of factors have increased longevity risk—the possibility that individuals will outlive their retirement savings.

Little Savings, Low Yields
A quarter of working Americans have no retirement savings, and 44% feel their savings are not on track.

What’s more, investors now face a low yield environment, affecting their ability to save. From its peak of over 15% in the early 1980s, the U.S. 10 Year Treasury Yield now sits below 2%.

Longer Lives, and More Retirees
With a higher life expectancy today than in previous generations, Americans need to save for a longer retirement. What’s more, the aging U.S. population will peak within the next few years—creating even more urgency.

At the other end of the working life scale, millennials will make up 75% of the global workforce by 2025. To avoid the same issues as baby boomers, they will need to set a strong retirement savings foundation from the start.

Layered Uncertainty
In 2020, the uncertainty of the U.S. election further complicates these longevity issues. With the political divide growing, heated opinions have dominated headlines—and many experts are predicting market volatility.

U.S. Elections and Market Performance

However, volatility doesn’t necessarily mean poor performance. In fact, it has generally translated to positive returns in election years. In the 23 election years since 1928, only four years have seen negative returns.

S&P 500 Stock Market Returns During Election Years

YearReturn
192843.6%
1932-8.2%
193633.9%
1940-9.8%
194419.7%
19485.5%
195218.4%
19566.6%
19600.5%
196416.5%
196811.1%
197219.0%
197623.8%
198032.4%
19846.3%
198816.8%
19927.6%
199623.0%
2000-9.1%
200410.9%
2008-37.0%
201216.0%
201611.9%
The average return during these years was 11.3%.

Sector Performance

An incoming administration’s policies have the potential to sway market segments and sector returns. For instance, sector dispersion increased substantially around the 2016 election.

Which sectors have done well historically?

From the beginning of the 2008 election year to the end of the Obama administration, the S&P 500 Health Care Index increased by 103%, compared to the 55% increase in the S&P 500 Index over the same period. It is possible that Obama’s pro-health policies contributed to the sector’s growth.

From January 2016 to January 2020, the S&P 500 Aerospace and Defense Select Industry Index increased by 143% compared to the 72% increase in the S&P 500 over the same period. The Trump administration has increased defense budgets and deals, which may have contributed to the sector’s strong returns.

What About Bonds?

Historically, bond returns tend to be lower than stocks—and election years are no different.

Bond and Stock Returns During Election Years

YearU.S. Aggregate Bond*S&P 500Difference
19802.71%32.50%-29.79%
198415.15%6.27%8.88%
19887.89%16.61%-8.72%
19927.40%7.62%-0.22%
19963.64%22.96%-19.32%
200011.63%-9.11%20.74%
20044.34%10.88%-6.54%
20085.24%-37.00%42.24%
20124.22%16.00%-11.78%
20162.65%12.00%-9.35%

*U.S. Aggregate Bonds represented by the Bloomberg Barclays U.S. Aggregate Bond Index.

During these years, the median average annual return for bonds was 4.79% compared to 11.44% for stocks. Bonds have provided important diversification and risk management during market downturns. However, upside returns are generally more limited.

Reaching Investment Goals

While historical performance helps us understand the big picture, returns during the 2020 election could vary widely.

Instead of trying to time the market, Americans can keep a long-term focus and, if suitable, consider investing more heavily in equities—a powerful option in the current low rate environment. This may help investors manage longevity risk, and potentially build a sufficient nest egg for retirement.

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