What is the effect of investing sustainably on my returns?

Key takeaways

  • The returns you earn when you invest sustainably could differ from those you could earn if your investments are not invested sustainably.
  • The extent to which your returns will differ will depend on the strategy adopted to invest sustainably. Screening out certain shares, for example, could result in your investment under-performing or out-performing an investment that does not screen these shares.
  • Investing in companies that do sustainable business should pay off in the long term as these are the businesses likely to survive and thrive.
  • If your investment has a tilt towards companies or entities that score well on ESG factors, you are likely to avoid companies with the worst risks and you should, in theory, be rewarded with higher returns over the long term.
  • Investing with an ESG focus introduces greater complexity in identifying risk and opportunities. As with any investment, it is possible for managers to get these calls right or wrong.
  • Analysing investments’ ESG criteria could introduce a higher cost which can be a drag on performance.

This is a hotly-debated topic with no conclusive answer. Performance can be measured over different periods to present arguments both for and against.

However, the overarching premise is that investing sustainably means investing in good businesses that should thrive over the long term, even if other businesses are able to make good profits in the short term. The phrase “doing well by doing good” is often used.

Arguments can be made about the benefits of reduced costs, such as energy costs, for businesses with low-carbon footprints; for improved productivity in companies whose staff are treated well; and better decisions made by company boards that are independent and diverse.

The issue is not so simple, though, and each investment case is unique. There may, for example, be costs and risks involved in doing good.

There may, therefore, be periods during which sustainable investments both under- and outperform those without a sustainable-investment focus.

You could expect returns that are different to the returns recorded for a benchmark with no sustainability considerations.

Investments that screen out certain shares or other securities may cause the greatest divergences in performance.

Avoiding risks

Investors and investment managers recognise that an ESG focus helps to identify risks and opportunities, but you need to assess their performance over suitable periods.

Avoiding companies that have poor corporate governance, are involved in practices that harm the environment or contribute to social injustices, presents a risk for investors. These issues may attract negative publicity or create environmental or social problems for the company. Any of these issues could impact the company’s share price.

Many South African investors have experienced the losses that can arise when you are invested in a company rocked by a governance scandal.

Equally, a company accused of, for example, a chemical leak that pollutes the environment, is likely to face not only negative publicity, but also potentially high costs of setting right the damage it has done.

Well-managed companies typically make good use of the capital shareholders invest in them, have lower staff turnovers and greater productivity.


There are also opportunities for investors and fund managers in investing in companies that have taken ESG considerations seriously.

A company involved in renewable energy or electric cars may be a good opportunity as consumers move to finding alternative sources of energy and transportation.

In addition, the demand for investments that do well on ESG considerations is likely to increase the price of these shares. This will create an investment trend that will benefit those who invest in shares with good ESG scores.

Managers and index providers have provided evidence that ESG investments and indices outperform those that do not have this focus.

During the Covid pandemic, companies with strong ESG scores have proven to be more resilient.

The focus is itself a risk

Relying on ESG factors to identify risks and opportunities does, however, introduce its own risk that the manager or index provider overstates these. This could lead an ESG investment to underperform a similar non-ESG investment.

Investors also need to be aware that ESG investments require more analysis which comes at a higher cost. Costs are a drag on investment performance.