US Republicans, supported by a few Democrats, pushed back against a rule that would make it easier for fund managers to consider sustainability in investment decisions. The debate shows including climate considerations in investing remains controversial. But we believe sustainability continues to gain traction and is becoming a key to investment success.
US President Joe Biden is expected to veto a Republican bill aimed at preventing pension fund managers from basing investment decisions on factors like climate change. The bill, which gained Senate approval on Wednesday after two Democrats joined Republicans, illustrates the potential for partisan divisions to impede the sustainability agenda.
Backers of the resolution say that the primary criterion has to be the financial return on investment, and that it would not stop funds from considering ESG issues altogether. The White House, however, has said President Biden will veto the measure.
The conflict highlights that considering the ESG performance of companies in investment decisions remains politically contentious. But we believe sustainability is becoming an increasingly important guide for investors.
Sustainability is a helpful guide to corporate performance for investors. Multiple studies have shown that companies that manage sustainability issues better tend to perform better. We also believe that firms that manage their business, stakeholders, and environmental impact better should be well-positioned to deliver on financial results. Research has also shown strong investment returns associated with the successful engagement of ESG issues. The annualized returns for MSCI ACWI ESG Leaders outperformed global equities (MSCI ACWI) both on a five-year and 10-year basis.
SI offers a diverse opportunity set. Certain parts of the sustainability investment universe underperformed last year as investors exited growth-oriented sectors in favor of value. But we think the volatility among growth companies says more about the importance of portfolio diversification than the SI approach itself. For example, we see numerous value-oriented opportunities in food supply chains, waste management, and recycling. In addition, ESG improver equities (Rockefeller Improvers ESG Index) have outperformed the Bloomberg US 3000 Total Return Index by two percentage points a year over the past five years.
Resilient fund flows to sustainable strategies underscore the commitment of investors. According to Morningstar, sustainable fund flows were more resilient throughout 2022 than broad market flows. This was especially evident in the fourth quarter, when global sustainable fund assets increased 11.6% quarter-over-quarter, almost double the growth of the broader market. Notably, “dark green” funds (those with sustainable investment as their key objective) in Europe saw uninterrupted inflows throughout the entire year, suggesting consistent investor commitment.
With strong capital commitments from governments and businesses alike, we continue to believe that sustainability should be a key long-term driver of investment returns. We recommend investors diversify across sectors, styles, and asset classes, and also see opportunities in themes including the circular economy, clean air and carbon reduction, smart mobility, and energy efficiency.