Oops We Did It Again

If anyone still thinks sustainability is a drag on financial performance, or otherwise thinks ESG can't add to financial performance, it's time to think again.

The evidence is now substantial, and we've been pointing this out for well over ten years now, back to when we found positively focused sustainable funds were outperforming benchmarks and negative screening for the 1, 3 and 5 years leading up to the end of 2007, and again up through the five years after the financial crisis.

Over the past five to ten years, please also witness the flows of assets in the tens of billions of dollars to fund managers such as Generation, Parnassus, Impax and Brown Advisory, and beyond, all of who attempt to outperform benchmarks and successfully achieve these goals by combining ESG with expertise and an eye on the business case.

Over the past ten years, we can see this specifically realized by the top performing funds in the US that look at sustainability, which are Parnassus Endeavor, followed closely behind by Praxis Growth Index, which does some excellent overall work on Impact per the Real Impact Tracker certification they achieved, and the Brown Advisory Sustainable Growth Fund performed best over the past five years through a specific effort that looks for companies which deploy "sustainability strategies which help generate tangible business benefits, in the form of revenue growth, cost improvement, or enhanced franchise value," which very much incorporates the Value Driver Model work we helped lead on in 2013.

The Value Driver Model work itself highlighted companies which on average significantly outperform their benchmarks while moving more in the direction of sustainability advantaged revenue and efficiency while managing their risks well. Recent research out of NYU Stern only confirms and further enhances these results as do companies such as Ingersoll-Rand, focused on providing more efficient cooling products in Asia, where they only figure to be increasingly required, and the company is +38.6% versus the S&P 500 + 17.7% this year alone. A quick visit to their website confirms their sustainability commitment.

All of this very much represents the ethos of the portfolios we build in our classes on sustainable investing, the latest illustration being student constructed portfolios at Brown University in our class The Theory and Practice of Sustainable Investing.

This past Spring 2019 semester, we coalesced around a five stock equally weighted portfolio as we typically do, this time consisting of Cisco Systems, Microsoft, Merck, NextEra Energy and Kurita Water Holdings, each of which are companies innovating towards better solutions for society in different ways, from renewable energy to healthcare and well beyond, while also appearing to have financial upside to achieve.

In the five weeks or so since we finalized our portfolio at the end of this class, these companies are up on average +7.3% versus the S&P 500 + 3.6% and the MSCI World was + 2.2% during the same period. No penalty for sustainability leadership to be sure.

Further, looking back on the first portfolio we constructed at Brown in 2016, over the last three years, this portfolio, consisting of Hannon Armstrong, Xylem, 3M, Alphabet and Applied Materials is now up +67.7% versus the S&P 500 +46.5%.

The very clear conclusion is that ESG, sustainability strategy and expertise, with an eye on the business case leads to financial outperformance, period.

Wait until climate change and the other societal challenges we face really begin to kick in.

Or better yet, don't wait, get on this bandwagon which creates an arguably necessary positive dynamic for creating a race for capital and shareholder value through positive sustainable investing.