Sustainable investments outperformed their traditional peers by almost 50% in 2023

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Investors who have stuck by their sustainable investing principles despite political blowback in the United States are being rewarded with outsized portfolio returns, a study released this week says.

Citing Morningstar data, the study by the Institute for Energy Economics and Financial Analysis found that in 2023 sustainable fund investments produced a median return of 12.6% compared with 8.6% for traditionally screened funds. That outperformance held for both stock funds and fixed-income investments and both mutual funds and exchange-traded funds.

“Asset owners are integrating ESG more, not less,” said Ramnath N. Iyer, the study author and research lead for sustainable finance, Asia. “Given their need for long-term performance, large asset owners understand the importance of incorporating sustainability outcomes into investment analyses and are likely to continue doing so.”

The 2023 data was not an anomaly, according to the study. Sustainable investments bested their traditional counterparts in 2019, 2020 and 2021 as well, underperforming only in 2022 when the Federal Reserve began to hike interest rates in the U.S. in order to combat inflation.

Environmental, social, and governance investing grew rapidly in investor and public consciousness between 2017 and 2022, the study said, and despite recent debate inflows into sustainable funds remain strong worldwide, especially in Europe. At the end of 2023 there was nearly $3 trillion invested in funds defined as sustainable by Morningstar.

“The increasing regulatory support and enhanced regulatory developments signal the mainstream adoption of climate, sustainability and ESG policies. It remains important to evaluate, gauge, and mitigate climate change risks when making investment decisions,” says Iyer, “Even the less stringent U.S. Securities and Exchange Commission’s climate disclosure requirements can be viewed as a first step.”

Despite the 2023 financial performance, ESG funds saw outflows of $900 million in the first quarter of 2024, the study found. However, that was driven by $8.8 billion of outflows in the U.S. By contrast, Europe, the most advanced regionally in terms of embracing sustainable funds, experienced an inflow of almost $11 billion into the asset class.

The Lakewood, Ohio-based IEEFA examines issues related to energy markets, trends, and policies. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy.

Read more: Creating a standard playbook for ESG investing