5 myths about sustainable investment and why they're wrong

If you’d like your investments to do some good as well as provide a financial return, you’re not alone.

Research from the Financial Conduct Authority (FCA) has revealed that 4 in 5 adults (81%) would like their money to have a positive effect on the world. This number increases for younger people, with Fidelity reporting that 87% to 95% of high net worth millennials were interested in sustainable investing.

Sustainable investing is often broken down into three sets of criteria – environmental, social, and governance (ESG):

• Environmental – focusing on a company’s carbon emissions, waste management, treatment of animals, or compliance with environmental regulations.

• Social – How a firm manages relationships with stakeholders. It focuses on workplace health and safety, workers’ rights, and how a company engages with its community.

• Governance – focusing on whether companies use accurate and transparent accounting methods, promote integrity and diversity, are accountable to shareholders and operate to high legal and ethical standards.

Despite the sharp rise in interest in sustainable/ESG investing in recent years, many myths persist. So, read on to discover some common misconceptions and why they may be wrong.

1.  Investing in sustainable funds is more expensive

One common myth is that it “costs” more to invest in sustainable funds in terms of fees.

However, this is not always the case. Fund manager Morningstar says that investments focusing on sustainable characteristics are “not necessarily more expensive than conventional funds”.

Their research compared the representative costs of ESG and non-ESG funds globally across six popular categories. They found that active ESG funds boast lower costs than their conventional peers in five out of six selected categories.

Morningstar concludes: “Our findings dispel the myth that ESG [sustainable] investments are inherently more costly”.

2. Returns from sustainable investments are not as good

A common argument against sustainable investing is that it doesn’t generate the same level of return as traditional investments.

While it can be hard to accurately compare the performance of ESG/sustainable funds, many have concluded that there is no evidence you have to sacrifice returns by investing in ways that generate a positive outcome for the world.

Raman Uppal, professor of finance at EDHEC Business School, told Reuters that “moving money from brown to green companies does not necessarily mean sacrificing returns”.

He added: “Doing so can help achieve environmental and social goals while still making good financial sense in terms of investment returns”.

Morningstar has reached a similar conclusion, saying that “across multiple tests, we’ve found that investors can build global portfolios tilted toward high-scoring ESG companies without compromising returns”.

Morgan Stanley, meanwhile, suggests that sustainable funds outperformed “traditional” ones across asset classes in 2023.

Source: Morgan Stanley (Morningstar data)

Note: *Other includes multi-asset, property, commodities and alternative fund types

The report confirms that the first half of 2023 saw the best fund performance and inflows. Median returns for sustainable funds approached 7% in the first half of the year, compared to just 3.6% for traditional funds during the same period. 

3. Sustainable investing is a buzzword, but no one is really doing it

While there have been many column inches about the demand for ESG investing, is anyone actually investing sustainably? Figures from Statista show they overwhelmingly are.

The chart below shows assets under management (AUM) of sustainable funds worldwide from 2018 to December 2023, in billion US dollars.

Source: Statista

An upward trend to December 2021 is clear, as is a dip in the first half of 2022. Global AUM has been increasing since then and closed in on its 2021 peak by December 2023.

Reuters reports that this trend is set to continue. They report that “vast sums” are being allocated to environmental, social, and governance projects, with PricewaterhouseCoopers forecasting an increase in ESG investing from $18.4 trillion in 2021 to $33.9 trillion in 2026.

In two years, sustainable investments are on pace to constitute 21.5% of total global assets under management.

4. Firms are engaged in greenwashing

Many critics of sustainable investing point to the problem of “greenwashing”. This is where companies mislead the public into believing that they are doing more to protect the environment than they are.

The Volkswagen emissions scandal is a well-known example of this practice. The car manufacturer admitted to cheating emissions tests by fitting various vehicles with a “defect” device, while simultaneously talking up the low-emissions and eco-friendly features of its vehicles in marketing campaigns.

Greenwashing undermines credible efforts to address the climate crisis, and deceptive marketing and false or exaggerated claims of sustainability can mislead investors.

While issues concerning greenwashing may persist, it is not the case that “there is no point in investing sustainably” for this reason.

Indeed, in spring 2024, the FCA introduced an “anti-greenwashing rule” to clarify to firms that sustainability-related claims about their products and services must be fair, clear, and not misleading. It gives the regulator an explicit rule on which to challenge firms if they believe companies are making misleading sustainability-related claims.

More widely, the United Nations secretary general, António Guterres convened a Climate Ambition Summit in September 2023, designed to leave “no room for back-sliders, greenwashers, blame-shifters or repackaging of announcements of previous years”.

In his pivotal speech on World Environment Day 2024, Guterres also called for a global ban on fossil fuel advertising and urged creative agencies to stop helping fossil fuel companies engage in greenwashing.

5. Sustainable investing involves only excluding “sin stocks”

The final common myth about sustainable investing concerns its methods. There is a widely held misconception that all sustainable investing does is exclude investments in certain specific “sin” sectors, such as gambling, arms, or tobacco.

While “negative screening” is a basic strategy for sustainable investing, many professionals use other approaches.

• “ESG optimisation” gives greater weight to companies that demonstrate high ESG metrics.

• “Thematic investing” invests in companies that stand to benefit from specific ESG-related themes – for example, renewable-energy companies.

• “Impact investing” aims to generate specific positive ESG effects in addition to returns. Common impact investing areas include healthcare, renewable energy, and education.

Furthermore, large institutional investors are increasingly engaging with company managers to improve a firm’s sustainability credentials.

So, a claim that sustainable investing only screens out “sin” stocks is false – it is just one of many sustainable investing strategies.

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The world of sustainable investing can help you to generate growth while helping the wider world. Please contact us to talk about what Parker FA’s experienced team can do for you.

Please note

This article is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.