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Robin Powell






An experienced television journalist, Robin runs Regis Media, a UK-based content marketing consultancy which helps financial advice firms around the world to attract, retain and educate clients.

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Dan Lefkovitz: Sustainable investing is an industry game-changer

Sustainable investing seems to be all the rage at the moment. But what exactly does sustainable investing mean? Is it here to stay? What additional risk, if any, does it entail? And is there a penalty to pay in terms of performance for investing with your conscience?

Dan Lefkovitz from Morningstar tackles all of these issues in the latest in a series of interviews we’re running as part of Ember Regis Group’s sponsorship of Inside ETFs, Europe’s largest ETF event, which takes place in London from 23rd to 25th October.

Please share this interview if you find it useful and, if you’d like to attend the event, we do still have a limited number of complimentary VIP passes for readers of Adviser 2.0. You simply have to register here using the VIP code REGIS at checkout. Remember to drop by at the Ember Regis stand to stay Hello.

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Dan Lefkovitz, thank you for your time. We’re very excited to have you deliver a keynote talk at the upcoming Inside ETFs Europe conference. We’re certainly seeing a lot of headlines around ESG and sustainable investing. Can you give us a quick definition of what sustainable investing is?

It’s a good question. There’s a lot of terminology. We used to hear about ethical funds and socially responsible funds, but there’s really a growing consensus around this sustainability terminology. We at Morningstar define sustainability as a long-term investing approach that incorporates environmental, social and governance criteria into investing. We’re really seeing it being adopted across the board, including by mainstream asset managers.

There’s always talk, with anything that’s new, that it’s just a fad. But are there drivers that show that sustainable investing might be a long-term solution for investors?

Yes, this has long been an approach that’s popular with institutional investors. The likes of the Norwegian Sovereign Wealth Fund, the Swedish Church, the Church of England, and big pension plans in the US like Calpers, have long paid attention to sustainability criteria. But we’re seeing a lot more adoption now at the retail level, and if you look at assets, there are $22 trillion invested sustainably globally. That’s up six times over the last ten years.

In terms of long-term drivers, demographic shifts are definitely at play. All the studies show that Millennial investors — folks in their 20s and 30s — care a lot more about sustainability than Baby Boomers and the generation before them. Women investors as well. And as assets are transferred to those two constituencies, it’s very likely that a lot more money is going to be put to work in sustainability.

And then on the other end, there is a growing recognition that this isn’t just about values. It’s also about financials. Companies that pay attention to their risks on the E, S and G pillars are just being sensible, and that can have a positive impact on performance over the long run. I think it’s about values as well as risk mitigation.

Speaking of risk, there’s certainly, some might say, a big risk sitting in the White House. Could government policies derail what we see taking place within sustainability?

It’s interesting. At the same time as these political dynamics are at work, we’ve seen big index providers — the likes of Vanguard, State Street, BlackRock — increasingly paying attention to ESG factors with the companies they own for the long term. Because they’re replicating indexes they’re stuck with their holdings, and we’ve seen them get much more active with shareholder resolutions. The same day actually that the US withdrew from the Paris climate change accord, there was a big Exxon-Mobil shareholder resolution that passed, with the support of those index passive managers I just mentioned, calling for climate-related disclosure.

So there’s a lot happening at the bottom up, at the grassroots level, to push for more disclosure and more attention to risk at the E, S and G levels.

But with all of that said, investors are always going to look to performance. Are these funds able to deliver the performance investors need to meet their financial goals?

At Morningstar we’ve introduced a sustainability rating for funds. It has a limited history, but we’re able to look at the performance of the funds that get the 5- and 4-globe ratings; those are the highest sustainability ratings. They perform pretty well; in aggregate they perform a little bit better than the average fund.

On the index side at Morningstar we have a sustainability index family, and we’ve seen the performance, and the risk-return profile, track pretty closely to the broad market.

If you look at the academic literature, it seems as though there’s a growing consensus that there’s really not a performance penalty associated with paying attention to E, S and G. So you don’t necessarily have to sacrifice returns.

Now that said, you are going to end up with portfolios that look different to the overall market, and depending on market conditions — you know, if there’s a huge rally in coal or tobacco or an industry that might be a little bit less favoured — you might see those ESG strategies lag. Over the long term, though, we think you shouldn’t have to pay a performance penalty for paying attention to ESG.

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