Ethical Returns

There is solid evidence that returns from well-managed ethical investments are, on average, at least as high as from conventional investing.

Large reviews of research suggest ethical and ESG investing can deliver returns that are broadly comparable to conventional investing, and on average, skew towards higher returns. In some cases, the inclusion of ethical and ESG risk analysis can improve the risk-and-return balance over time.

That doesn't mean every ethical fund will outperform. Returns will always vary, and different funds will generate different results. But if an investor is concerned that investing ethically is likely to result in lower returns, the weight of credible research suggests the answer is generally not.

The evidence:

Evidence includes large datasets of comparative studies such as:

• Hamburg University analysed 2,200 comparative studies and found the majority show higher returns for responsible investing.
• Morgan Stanley's Institute for Sustainable Investing examined 11,000 studies and found that responsible investment funds have comparable or better returns than conventional funds.
• The European Securities and Markets Authority compared ESG and non-ESG active equity funds in Europe during the sharp market fall and recovery around the early COVID period. The research found ESG funds performed slightly better than non-ESG peers during the stressed period.
• New York University Stern Centre for Sustainable Business examined more than 1,000 research papers published between 2015 and 2020 on ESG and financial performance. The review found that 59% reported positive or neutral results, while only 14% reported negative outcomes.

In summary, across a large body of evidence, ethical/ESG approaches are more often linked to outcomes that are similar to, or better than, conventional investing than they are linked to underperformance.

Why do ethical investments perform well?

Companies with strong environmental, social, and governance (ESG) practices tend to be well-managed overall. They tend to:

• Avoid fines and lawsuits for environmental damage or social harm
• Build stronger brand value and customer loyalty
• Have more engaged and productive employees
• Face lower regulatory and reputational risks
• Tend to operate in growing rather than declining industries

By contrast, companies that behave badly often suffer financially—from regulatory penalties, consumer boycotts, stranded assets, or market declines in unsustainable sectors.

Mis-pricing of assets often occurs for investments related to sustainability and climate change. There may be over-valuation because of uncounted risks from an investment that is likely to be subject to regulation or consumer action in future (Economist Nicholas Stern famously described climate change as "the greatest and widest-ranging market failure ever seen"). Or there may be under-valuation of sustainability and climate solutions that result from analysts failing to realise the importance of the issue. Financial markets are often described as 'efficient' but fail to take into account these and other systemic issues. This mis-pricing extends to other aspects of sustainability and ethical practice.

Important note: While the evidence is positive overall, there are no guarantees that any specific fund will earn high returns. All investments carry risk, and ethical investing is no exception. Past performance is not a reliable indicator of future performance.

The good news is that, as well as good financial returns, there are also other benefits from being responsible. You invest in ways that align with your values, you shift money away from companies that pollute the environment and exploit people, and you create societal benefits. Every time you invest money, you are making a vote for the kind of world you want to live in.

If you want to dive deeper into the evidence, learn more about the evidence here.