One of the main questions people have about sustainable investing is does sustainable investing hurt returns? This is partly because social screens had a reputation for impacting performance by excluding stocks from portfolios, which money managers don’t always like. Many were also critical, telling clients not to worry about it and make a donation to their favorite charity instead. I worked with one guy who told clients to contribute to the Sierra Fund with their energy profits. Thank goodness those days are over.
But it’s also a function of investing’s main purpose: to create returns. Driving positive change with your portfolio is one thing. Doing it without sacrificing returns is even better. The team at Dimensional Fund Advisors just released a lengthy study answering the question – does sustainable investing hurt returns?
It’s technical, but their main takeaway is easy to understand:
“Our results suggest that investors can pursue environmental goals without compromising sound investment principles.“Greenhouse Gas Emissions and Expected Returns by Wei Day, Phillip Meyer-Brauns
Dimensional’s Study on Sustainable Investing and Returns
They looked at whether company-level emissions data impacted company financials and the expected returns of those companies stocks and bonds. Twenty-two pages later, the answer was no. After studying global stocks and US corporate bonds for a decade they found that emissions information did not impact returns.
“Our study of the relation between emissions and expected returns covers the US, developed ex US, and emerging markets stocks as well as US corporate bonds from 2009 to 2018. We examine firm-level emissions profiles through three metrics: emission intensity, emission level, and change in emission level.
We do not find evidence of a reliable link between a firm’s emissions profile and future stock returns. Over the sample period, there are mixed results about the relation between stock performance and emission intensity, emission level, and change in emission level. When controlling for the known drivers of expected returns (size, value, and profitability), there is generally little evidence that a firm’s emissions profile provides additional information about expected stock returns.
Turning to fixed income, the data similarly do not show a reliable relation between emission profiles and corporate bond returns. Much like in the equity investigation, this finding also holds true when we control for well-known drivers of expected bond returns.“What a Company’s Emissions Tell Us about Its Expected Returns
By Wei Dai, PhD Senior Researcher and Vice President | Philipp Meyer-Brauns, PhD Senior Researcher and Vice President
This finding is consistent with other studies and good news for investors who are concerned about sustainability and want to align their investments with those concerns.
For further reading on sustainable investing, check out Sustainable Investing Thoughts.