Some investors and financial professionals are skeptical of sustainable investing because, intuitively, shrinking one’s investable universe could make outperforming the market more difficult. However, as we discussed in our recent Thought Leadership piece, Sustainable Investing, this isn’t necessarily the case.
The MSCI KLD 400 Social Index is a commonly used benchmark index for sustainable investments. This index reflects both best-in-class and socially responsible investing, in that it includes U.S. firms with the highest environmental, social, and governance (ESG) factor ratings relative to their industry peers, but it also excludes companies in the alcohol, gambling, tobacco, weapons, and adult entertainment industries. The table below shows a performance comparison between this index and the S&P 500 Index over the past 10 years.
As the table shows, even with its smaller universe of available investments, the MSCI KLD 400 Social Index managed to not only keep pace with the S&P 500, but actually outperformed it by a small amount while taking slightly less risk, as exemplified by its higher Sharpe ratio and lower beta vs. the S&P 500. Although this doesn’t guarantee that sustainable investing will provide higher returns in all cases, it does make the point that a properly constructed sustainable portfolio does have the potential to keep up with the broader market, contrary to what some may believe.
Sustainable Investing is subject to numerous risks, chief amongst them that returns may be lower than if the advisor made decisions based only on investment considerations.
The economic forecasts set forth in the presentation may not develop as predicted.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
Indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.
This research material has been prepared by LPL Financial LLC.
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