Sustainability Drives Despite US Political Split

US President Joe Biden is likely to veto the bill that would stop pension fund managers from taking climate change and other similar factors into account when making investment decisions.

The Senate-approved bill, supported by both Democrats and Republicans, shows that partisan divides may pose challenges to achieving sustainability goals.

Its supporters assert that investment decisions should primarily be based on financial returns and that it does not preclude considering ESG factors altogether.

However, the White House intends to veto the measure. This disagreement highlights the political controversies surrounding the integration of ESG performance into investment decisions. Despite this, there is increasing recognition of the importance of considering financially relevant sustainability information when making investment decisions.

Research indicates that sustainability is a useful gauge of corporate performance for investors. According to multiple studies, companies that handle sustainability issues well tend to perform better over the long term. It is also believed that firms that effectively manage their businesses, stakeholders, and environmental impact are better placed to achieve financial results. The research also reveals that addressing ESG issues successfully can yield strong investment returns. For example, the annualised returns of MSCI ACWI ESG Leaders outperformed global equities (MSCI ACWI Index) over both five- and ten-year periods.

Sustainable investing provides a broad range of investment options. While certain segments of the sustainability investment market lagged last year as investors shifted from growth-oriented sectors to value, the volatility among growth companies underscores the significance of portfolio diversification. For instance, opportunities exist in value-oriented areas such as food supply chains, waste management, and recycling. Moreover, equities that aim to improve their ESG performance (Rockefeller Improvers ESG Index) have outperformed the Bloomberg US 3000 Total Return Index by an average of two percentage points annually over the past five years.

Investors' steadfast commitment to sustainability is reflected in the fund flows to sustainable strategies, which remained more resilient than broad market flows throughout 2022, according to Morningstar. In Q4, global sustainable fund assets rose by 11.6% quarter-over-quarter, almost twice the growth rate of the broader market. Notably, "dark green" funds in Europe experienced uninterrupted inflows throughout the year, indicating steady investor commitment.

With strong support from governments and businesses, sustainability is expected to be a significant driver of investment returns in the long run. Investors are advised to diversify across sectors, styles, and asset classes and explore opportunities in themes such as the circular economy, clean air and carbon reduction, smart mobility, and energy efficiency.

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Source: UBS

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