The immense benefits of long-term investing for long-term sustainable aims

From 6th to 18th November, the 27th Conference of the Parties of the United Nations Framework Convention on Climate Change (UNFCCC) will be held in Egypt, more commonly referred to as “COP27”. 

First taking place in 1995, the annual summit is the formal meeting of the UNFCCC to assess international progress in dealing with climate change.  

At the previous COP26 summit in Glasgow in 2021, nearly 200 nations met to discuss the increasingly pressing issue of environmental sustainability, culminating in the signing of the Glasgow Climate Pact and the agreement of the Paris Rulebook. 

While these policies and pacts might seem like issues exclusively for governments to solve, individual investors can also make a significant contribution to battling climate change. Indeed, you have a remarkable amount of power to influence the global effort towards climate sustainability in the way you invest your money.  

Read on to discover how including the need for long-term sustainable action in your investments can have a positive effect on both the planet and your portfolio – and why there’s still much more action needed in the fight against climate change.  

Aligning your long-term investment goals with your own sustainable aims and beliefs 

The past few decades have seen sustainable investments become more accessible than ever before, as many investors have sought to align their investment goals with the needs of the planet, mirroring their own beliefs and values.  

Indeed, according to Refinitiv, the value of sustainable investment in major, global financial markets was $35.3 trillion at the start of 2020. This amount has likely increased since then.  

This progress is likely to be a positive for the planet. In fact, you may have read our previous blog on “climate doomism”, where we highlighted a fascinating study reported by PensionAge that shows just how effective sustainable investing can be in mitigating climate change.  

Campaign group Make My Money Matter revealed that moving an average-sized pension pot of around £30,000 from a traditional global equity fund to an equity focused sustainable fund could potentially save 19 tonnes of carbon a year. According to calculations based on data supplied by Pawprint that’s equivalent to one person not driving just under 34,500 miles in one year; that’s over 5 years of driving for the average UK driver.  

This simple change is estimated to be 21 times more effective in reducing a carbon footprint than going vegan and not flying, combined.  

As a result, you can see the potential environmental benefits of including the $35 trillion worth of sustainable investments held around the world.  

Although 2022 has been tricky, long-term performance of sustainable funds has been strong 

Crucially, it’s valuable for you to know that, while 2022 has been a difficult year for stock markets worldwide, the long-term performance of sustainable funds has been notably strong. 

Many investments have struggled in the currently volatile climate, and sustainable options have been no different. In fact, they have endured a tricky year so far in these unusual market and geopolitical conditions.  

In June 2022, Bloomberg reported that ESG equity funds had “done better this year than their non-ESG counterparts”. At this point, ESG investments had managed to stay ahead of non-ESG options simply by being down less than the others. 

However, more recent data suggests that ESG funds have since struggled. Research from Investment Metrics and published by Citywire Selector in September compared the performance of ESG equity products to the MSCI ACWI World index, a global list of mid- and large-cap stocks across nearly 50 developed and emerging markets. 

These figures revealed that, while 80% of global ESG equity products had outperformed the index in the three years to June 2022, 78% of them underperformed the benchmark in the six months to September. 

Even so, despite the difficulties that funds have faced this year, short-term periods of market volatility are not necessarily the measure to judge sustainable funds by. Indeed, their long-term performance is likely to provide more context as to how these funds can contribute to your portfolio. 

Morningstar assessed the performance and success rates of sustainable funds against traditional options over a period of 10 years to 2019. 

This research revealed that more than 7 out of 10 sustainable large-cap equity funds in the US achieved greater returns than their equivalent surviving traditional fund. As ever, it is important to realise that past performance is not an indicator of future performance.  

Results were also similar globally, finding that the average “large-cap blend” sustainable fund delivered annualised returns of 6.9%, while traditional funds lagged slightly behind at 6.3%. 

So, despite the dip in performance in these turbulent market conditions, sustainable funds do have a history of successfully competing with and even surpassing their traditional equivalents. 

More action is needed in the fight against climate disaster 

However, despite the positive impact sustainable funds can have, and the progress made last year in Glasgow at COP26, evidence shows that much more action will be needed in the battle against climate disaster. 

Research reported by Carbon Brief describes a “significant likelihood” of multiple “tipping points” in the event that global temperatures exceed pre-industrial levels by 1.5 degrees Celsius. 

The real-world effects of this are becoming more observable, too. NewScientist reported the risk that global warming could kill off three-quarters of trees grown in urban environments – a somewhat ironic fact, considering that city trees can keep locations up to 12 degrees Celsius cooler in the summer.  

Meanwhile, Al Jazeera noted the World Weather Attribution’s analysis that human-caused global warming was likely a factor in the deadly floods that have afflicted Pakistan, killing more than 1,500 people as of September.  

These issues are also becoming closer to home. At the end of September, the Evening Standard noted a warning from the Environmental Agency that “significant” action is required on climate change, as most of England remains in drought. England of course has just experienced it’s hottest summer on record and the highest temperature ever recorded in the UK of 40.3°C, with Northern Ireland recording its highest temperature on record of 31.2°C, Scotland at 35.1°C and Wales at 37.1°C. 

All in all, these concerns are stark reminders that while action on climate is coming, much more will be needed moving forwards. This might serve as a motivation to include sustainable investments in your portfolio, putting your money into funds that can make a measurable difference on your carbon footprint. 

Want to align your investments with your values?  

If you’d like to find out how ESG and sustainable investments could be useful as part of your long-term investing strategy, please do get in touch with us.  

Email us at advise-me@fosterdenovo.com or call us on 0330 332 7866. 

Please note 

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances. 

The FD Sustainable Dynamic Portfolios are investment portfolios provided by FD Dynamic Portfolios Limited (FDDPL) which is an appointed representative of Foster Denovo Limited (FRN 462728), and is authorised and regulated by the Financial Conduct Authority (FCA). FDDPL has issued this article in its capacity as investment adviser to the investment manager, AB Investment Solutions Limited (FRN 705062), which is authorised and regulated by the Financial Conduct Authority (FCA).