Eco-investments have long had a bad reputation. But the reality is different: Companies that follow ESG guidelines are addressing the exciting mega topics of the future. For investors, this often opens up above-average return opportunities.
A rethinking is currently taking place in numerous companies. Ecological, social, and ethical standards are gaining relevance and are being issued as central parameters based on which investment decisions are made. In recent years, climate and sustainability aspects have led to a paradigm shift in society, which companies can no longer ignore. Only those who adapt are perceived with a positive image and are an investment opportunity for international investors.
However, the shift to a more environmentally friendly and green economy comes with major challenges. Circular, efficient, inclusive, and clean are the four premises guiding the change. In practice, however, the resulting goals, such as less waste and dematerialization, better utilization of existing resources, and production processes that are as emission-free as possible, place great financial burdens on many companies and tie up resources. But the investments are worthwhile: Those who face up to the challenges now and work on the mega topics of the future also create a good basis for above-average growth in the long term. Because with sustainable investments, companies are investing in progress and the future. The transformation process is also interesting for investors and offers lucrative opportunities for several reasons. Compared with traditional investments, ESG investments score above all on important criteria such as return and risk. One example is the Morningstar Europe Sustainability Index, which achieved an average annual gain of 6.6 percent in the five years to the end of 2020. By contrast, the Europe Large-Mid Cap Index climbed by less than five percent.
Sustainable funds and ETFs on global equities have also mostly performed well in the recent past. In particular, areas that have received policy support, such as alternative energy, have shown significant outperformance relative to the overall market. For example, the iShares Global Clean Energy ETF significantly outperformed major world equity barometers such as the MSCI World and even outperformed the broad market by a factor of ten in 2020. In addition to higher performance, ESG investments also reduce the portfolio's susceptibility to fluctuation in more turbulent market phases. At the end of 2018 and in the first quarter of 2020, when the Corona crisis triggered a crash in the stock markets, sustainability-focused indices lost less ground than the broad market. However, investors need to look carefully when choosing. There are now several hundred funds and ETFs that focus on sustainability.