When it comes to investment returns and environmental and social benefits, some investors may think that they cannot coexist.
The performance of green and sustainable investing in 2022 may support this view. Many sustainability or ESG indices that focus on mitigating ESG risks are overweight in technology stocks while maintaining an underweight in or avoiding the energy stocks. However, the energy sector was strong while technology sector was weak under interest rate hikes and high oil prices environment last year. Therefore, many sustainability or ESG indices underperformed their parent indices last year.
Focus on the long-term return
Investing should be long-term and we cannot evaluate the performance of an investment with the data of one or two years. While green and sustainable investing’s performance over the last year was relatively weak, its five-year performance has been different. According to Morningstar, only 27% of the 134 sustainability indices outperformed their parent indices in 2022. However, for the five years as of 2022, 78% of the 127 sustainability indices outperformed their parent indices.
Green and sustainable investing has a diverse range of themes and strategies. Despite the lackluster overall performance last year, certain green and sustainable themes or strategies still outperformed the broader market or their parent indices. For example, some gender equality indices which underweight in the technology sector but overweight in the healthcare and consumer staple sectors, as well as indices that are overweight in the renewable energy sector, generally outperformed their parent indices last year.
Take both return and ESG into consideration
It is natural to look for return from investment. However, solely focusing on return may not align with the concept of green and sustainable investing. In addition to financial returns, green and sustainable investing is an investment approach that takes ESG factors into consideration. Regardless of their strategies or approaches, such as negative screening, best in class or thematic investing, the common principle of stock selection and allocation of these investments is to pick companies that perform better from an ESG perspective.
Green and sustainable investments have been around for quite some time now, and there should be data for investors to assess the returns and risks of these investments and make informed decisions. Meanwhile, some investors may think that there are not many choices available in this area, but as this investment concept has gained much traction, more related indices and financial products have been launched in recent years. Currently, there are almost 200 ESG funds authorised by the SFC that can be offered to the Hong Kong public, representing an over five-fold growth from 2020.
