Is indexed sustainable investing better?
Posted: Wed Dec 11, 2024 10:53 am
Our clients frequently ask us questions related to which is the best investment, whether sustainable or standard indexed. For example:
What do you recommend: a sustainable indexed investment portfolio or a standard indexed portfolio?
Which is more profitable?
And in general, what is better, indexed or standard sustainable investment?
Let's try to answer these questions.
We will try to answer this question using extracts from the tables that we reproduce at the end of this post as annexes. Do not hesitate to consult them if you want to deepen your analysis.
This post complements other articles we wrote in the past on ESG/SRI indices such as:
SRI equity indices are more efficient .
ESG/SRI corporate bond indices have lower risk .
Table of Contents
Is the return on sustainable index investing better?
Is sustainable index investing less risky?
Is sustainable index investing more efficient?
Is indexed sustainable investing better?
The answer to whether a sustainable portfolio is better or not is actually up to us.
But what about inbestMe?
EXHIBIT:
Summary:
Is the return on sustainable index investing better?
The answer to this question is… It depends.
best sustainable investment APR
Average APR of inbestMe ISR portfolios vs. Standard 1/1/2015 to 3/15/2022
Looking at the table above, the average APRs of our portfolios since 2015, we see that the average returns of indexed sustainable investment (depending on the type of portfolio, from 4.5% to 5.9%) are equal or almost equal to those of standard indexing for index fund portfolios, and better for ETF and pension plan portfolios. If so, why do we answer that it depends, if in addition in 2021 they stood out again ?
best sustainable investment 1 year to YTD
Average returns for the last year and current year of inbestMe ISR vs. Standard portfolios as of 3/15/2022
If we look at the table above, although inbestMe's SRI portfolios have generally continued to perform better over the last year, they have fallen somewhat more during 2022.
Therefore, the correct answer is that it depends on the period and the risk profile selected (in general, high-profile SRI portfolios have better returns, but this is not so much the case for lower profiles; see the more detailed tables in the appendix).
Long-term APRs are generally better or equal for SRI portfolios, but over shorter periods we have seen that this may not be the case, and above all, no one can guarantee that they will be better in the future. Even so, there are two elements that give us certain guarantees:
The portfolios remain indexed, and although the correlations of the SRI indexed portfolios are one to three tenths lower on average (compared to the MSCI World), we continue to benefit from indexing.
The best companies are those that tend to pay more attention to everything related to sustainability.
Model portfolios best sustainable investment
Illustrative: historical evolution from 1/1/2015 to 28/2/2022 of female phone number data several model portfolios (profiles 3/5/7/9) in standard index funds (grey) and SRI index funds (blue). As can be seen, they are often confused. A profile 7, for example, accumulates 55% in both cases at the end of February 2022.
Is sustainable index investing less risky?
Volatility and Max.Drawdown best sustainable investment
Volatility and average maximum drops of inbestMe ISR portfolios vs. Standard 1/1/2015 to 3/15/2022
In the table above we see two of the most commonly used risk measures, volatility and drawdowns from highs (“max.drawdown”). On the one hand, we see that SRI portfolios generally have somewhat lower average volatility. But as for drawdowns from highs, we see less decisive results, and sometimes they are slightly higher for SRI portfolios (in index funds).
Download the socially responsible investment guide
Is sustainable index investing more efficient?
Sharpe Ratio of best sustainable investment
Average Sharpe ratio of inbestMe ISR portfolios vs. Standard 1/1/2015 to 3/15/2022
If we take the Sharpe ratio as a measure of efficiency, we can see in the table above that the SRI portfolios of ETFs and pension plans are clearly better. As for the index fund portfolios, we see that this is not always the case, although when it is not (index funds > €5,000) it is very similar.
So far we have shown that the performance of inbestMe's sustainable indexed portfolios is often better in many financial parameters and when they are not better, they are equal or very similar. The performance of our sustainable indexed portfolios should not be a deterrent, it is as good or better than their standard indexed portfolios since we measured them .
Still, we haven't answered the question of whether index-based sustainable investing is better.
Is indexed sustainable investing better?
When we talk about “better” we must also consider that there are investors who increasingly value other non-financial parameters. And that is where our values and preferences come into play.
This is not the first time we have said that it is advisable to opt for a sustainable indexed portfolio if it fits with our values, that is, if we believe that sustainability is important for us, for humanity, and we also want to contribute with our investment style.
sustainable indexed investment from inbestMe
% of sustainable funds and degree of sustainability of inbestMe ISR portfolios vs. Standard 1/1/2015 to 15/3/2022
socially responsible SRI index funds
The answer to whether a sustainable portfolio is better or not is actually up to us.
In the table above we have summarized the degree of sustainability of all portfolios.
All our sustainable portfolios take into account the following:
Exclude controversial industries (it is the X shown in the table in the SRI portfolios)
They incorporate the best index funds or ETFs with the highest degree of ESG filtering. They select the “best-in-class” companies by sector and can be identified by the letters, and the more “A”s they have, the better.
They incorporate several positive impact index funds or ETFs in line with the United Nations Sustainable Development Goals. They can be identified by the “+” signs in the SRI portfolios.
To do this, we select the best ESG, SRI or positive impact index funds and ETFs from the best global asset managers (iShares, Amundi, Vanguard, etc.).
We can see in the table above that the sustainability level of inbestMe's SRI portfolios is clearly better than their corresponding standard indexed portfolios . There is no doubt about that .
The average percentage of sustainable index funds (68%/79%) or ETFs (79%/88%) in SRI portfolios is clearly higher than in standard portfolios. Specifically, between 0% and 9%, a little higher in pension plans, since we use a plan with a certain SRI bias for fixed income.
But what about inbestMe?
This does not make them perfect by any means. We sometimes receive questions or comments about this. Our sustainable portfolios continue to invest in thousands of companies around the world and they are not perfect. Our world is not perfect, neither is our economy, nor is humanity.
Our sustainable portfolios don't either, because at the end of the day, although they have a higher degree of sustainability, they cannot completely eliminate all that imperfection, that is impossible.
Of course, our commitment is to continue improving them as much as the offer of sustainable index funds and ETFs allows us.
Whether or not we choose a sustainable portfolio has to be because we care about socially responsible investment. That is why the answer to whether one portfolio is better or worse than another is up to each of us. It has to do with our values or preferences.
Financial parameters do not and will not always be in favour of sustainability. That is why we must ask ourselves, if at some point this is not the case, whether our priority will continue to be to invest sustainably or not.
For the inbestMe team, creating sustainable indexed portfolios was a challenge and an obligation due to the belief that the investment will be sustainable or it will not be.
At inbestMe we already made our choice in 2018, being leaders in indexed SRI, because we believe that sustainable investment is here to stay.
We did this through indexing because we believe that it allows us to be “sustainable squared”: sustainability of the portfolios, multiplied by the low costs and efficiency of indexing.
Currently, SRI portfolios represent 40% of our managed volumes.
The answer to whether a sustainable portfolio is better for you is up to you . In any case, its performance should not be an excuse: as we have seen, at the moment it is similar, equal and very often better.
What do you recommend: a sustainable indexed investment portfolio or a standard indexed portfolio?
Which is more profitable?
And in general, what is better, indexed or standard sustainable investment?
Let's try to answer these questions.
We will try to answer this question using extracts from the tables that we reproduce at the end of this post as annexes. Do not hesitate to consult them if you want to deepen your analysis.
This post complements other articles we wrote in the past on ESG/SRI indices such as:
SRI equity indices are more efficient .
ESG/SRI corporate bond indices have lower risk .
Table of Contents
Is the return on sustainable index investing better?
Is sustainable index investing less risky?
Is sustainable index investing more efficient?
Is indexed sustainable investing better?
The answer to whether a sustainable portfolio is better or not is actually up to us.
But what about inbestMe?
EXHIBIT:
Summary:
Is the return on sustainable index investing better?
The answer to this question is… It depends.
best sustainable investment APR
Average APR of inbestMe ISR portfolios vs. Standard 1/1/2015 to 3/15/2022
Looking at the table above, the average APRs of our portfolios since 2015, we see that the average returns of indexed sustainable investment (depending on the type of portfolio, from 4.5% to 5.9%) are equal or almost equal to those of standard indexing for index fund portfolios, and better for ETF and pension plan portfolios. If so, why do we answer that it depends, if in addition in 2021 they stood out again ?
best sustainable investment 1 year to YTD
Average returns for the last year and current year of inbestMe ISR vs. Standard portfolios as of 3/15/2022
If we look at the table above, although inbestMe's SRI portfolios have generally continued to perform better over the last year, they have fallen somewhat more during 2022.
Therefore, the correct answer is that it depends on the period and the risk profile selected (in general, high-profile SRI portfolios have better returns, but this is not so much the case for lower profiles; see the more detailed tables in the appendix).
Long-term APRs are generally better or equal for SRI portfolios, but over shorter periods we have seen that this may not be the case, and above all, no one can guarantee that they will be better in the future. Even so, there are two elements that give us certain guarantees:
The portfolios remain indexed, and although the correlations of the SRI indexed portfolios are one to three tenths lower on average (compared to the MSCI World), we continue to benefit from indexing.
The best companies are those that tend to pay more attention to everything related to sustainability.
Model portfolios best sustainable investment
Illustrative: historical evolution from 1/1/2015 to 28/2/2022 of female phone number data several model portfolios (profiles 3/5/7/9) in standard index funds (grey) and SRI index funds (blue). As can be seen, they are often confused. A profile 7, for example, accumulates 55% in both cases at the end of February 2022.
Is sustainable index investing less risky?
Volatility and Max.Drawdown best sustainable investment
Volatility and average maximum drops of inbestMe ISR portfolios vs. Standard 1/1/2015 to 3/15/2022
In the table above we see two of the most commonly used risk measures, volatility and drawdowns from highs (“max.drawdown”). On the one hand, we see that SRI portfolios generally have somewhat lower average volatility. But as for drawdowns from highs, we see less decisive results, and sometimes they are slightly higher for SRI portfolios (in index funds).
Download the socially responsible investment guide
Is sustainable index investing more efficient?
Sharpe Ratio of best sustainable investment
Average Sharpe ratio of inbestMe ISR portfolios vs. Standard 1/1/2015 to 3/15/2022
If we take the Sharpe ratio as a measure of efficiency, we can see in the table above that the SRI portfolios of ETFs and pension plans are clearly better. As for the index fund portfolios, we see that this is not always the case, although when it is not (index funds > €5,000) it is very similar.
So far we have shown that the performance of inbestMe's sustainable indexed portfolios is often better in many financial parameters and when they are not better, they are equal or very similar. The performance of our sustainable indexed portfolios should not be a deterrent, it is as good or better than their standard indexed portfolios since we measured them .
Still, we haven't answered the question of whether index-based sustainable investing is better.
Is indexed sustainable investing better?
When we talk about “better” we must also consider that there are investors who increasingly value other non-financial parameters. And that is where our values and preferences come into play.
This is not the first time we have said that it is advisable to opt for a sustainable indexed portfolio if it fits with our values, that is, if we believe that sustainability is important for us, for humanity, and we also want to contribute with our investment style.
sustainable indexed investment from inbestMe
% of sustainable funds and degree of sustainability of inbestMe ISR portfolios vs. Standard 1/1/2015 to 15/3/2022
socially responsible SRI index funds
The answer to whether a sustainable portfolio is better or not is actually up to us.
In the table above we have summarized the degree of sustainability of all portfolios.
All our sustainable portfolios take into account the following:
Exclude controversial industries (it is the X shown in the table in the SRI portfolios)
They incorporate the best index funds or ETFs with the highest degree of ESG filtering. They select the “best-in-class” companies by sector and can be identified by the letters, and the more “A”s they have, the better.
They incorporate several positive impact index funds or ETFs in line with the United Nations Sustainable Development Goals. They can be identified by the “+” signs in the SRI portfolios.
To do this, we select the best ESG, SRI or positive impact index funds and ETFs from the best global asset managers (iShares, Amundi, Vanguard, etc.).
We can see in the table above that the sustainability level of inbestMe's SRI portfolios is clearly better than their corresponding standard indexed portfolios . There is no doubt about that .
The average percentage of sustainable index funds (68%/79%) or ETFs (79%/88%) in SRI portfolios is clearly higher than in standard portfolios. Specifically, between 0% and 9%, a little higher in pension plans, since we use a plan with a certain SRI bias for fixed income.
But what about inbestMe?
This does not make them perfect by any means. We sometimes receive questions or comments about this. Our sustainable portfolios continue to invest in thousands of companies around the world and they are not perfect. Our world is not perfect, neither is our economy, nor is humanity.
Our sustainable portfolios don't either, because at the end of the day, although they have a higher degree of sustainability, they cannot completely eliminate all that imperfection, that is impossible.
Of course, our commitment is to continue improving them as much as the offer of sustainable index funds and ETFs allows us.
Whether or not we choose a sustainable portfolio has to be because we care about socially responsible investment. That is why the answer to whether one portfolio is better or worse than another is up to each of us. It has to do with our values or preferences.
Financial parameters do not and will not always be in favour of sustainability. That is why we must ask ourselves, if at some point this is not the case, whether our priority will continue to be to invest sustainably or not.
For the inbestMe team, creating sustainable indexed portfolios was a challenge and an obligation due to the belief that the investment will be sustainable or it will not be.
At inbestMe we already made our choice in 2018, being leaders in indexed SRI, because we believe that sustainable investment is here to stay.
We did this through indexing because we believe that it allows us to be “sustainable squared”: sustainability of the portfolios, multiplied by the low costs and efficiency of indexing.
Currently, SRI portfolios represent 40% of our managed volumes.
The answer to whether a sustainable portfolio is better for you is up to you . In any case, its performance should not be an excuse: as we have seen, at the moment it is similar, equal and very often better.