In addition, the research said the companies that take into consideration ESG issues tend to be companies that have stronger performances than those companies that ignore the risk and opportunities presented by the issues of sustainability.
Morningstar’s research revealed that companies with superior overall sustainability performance have better credit ratings, that firms with environmental management systems have lower credit spreads, and that firms with significant environmental challenges have higher credit spreads. Also companies that handle environmental issues better than their peers have significantly lower cost of equity.
Investors who put their money into sustainable companies encourage the companies by providing them with more capital. That, in turn, can encourage other companies to improve their sustainability performance, Morningstar said.
Morningstar acknowledges there are challenges to sustainable investing, including the fact that the number of sustainable funds remains at only 1 percent to 2 percent of the market, which makes it difficult to find funds to fill out a portfolio.
There is also a range of fund quality and manager skill that must be researched before investing just as there is in conventional funds. “But there is no reason, based on the academic research on performance, to steer clients away from making sustainability a part of their investments.”