Sustainable Investments: Why patience could pay off
Despite short-term market reactions, risks to the environment and society remain. This presents opportunities for sustainable solutions. Accordingly, investors interested in sustainability should keep a long-term horizon in mind.
"Political markets have short legs," goes an investor's proverb. However, the changes in the geopolitical landscape, especially since the change in administration in the USA, have been gripping the financial markets for months now.
The turbulence has also affected investments in companies that strive to contribute to sustainable development with their products and services and consider environmental, social, and governance (ESG) criteria in their business operations. In many cases, they have experienced temporary valuation declines. This has also been noticeable in some sustainable investment strategies.
Long-term risks are still present
As a result, an old debate has been reignited: how to reconcile sustainability demands with reasonable investment returns. Particularly, the recent gains in companies in the oil and gas industry or the defense sector fuel concerns that sustainable investing might come at the expense of performance. In Swisscanto's offerings, these sectors are partially subject to exclusions (see box below).
However, despite short-term market reactions, the long-term risks that sustainable development aims to address remain. These include climate change caused by greenhouse gas emissions or the resource depletion of our throwaway society. The issue of civilian firearms and ammunition has also not disappeared. According to the Small Arms Survey organization, around 250,000 people die worldwide annually from firearms.
Exclusion criteria for responsible investments
For our Swisscanto investment solutions, we have defined the framework for environmentally and socially responsible investments. Different exclusion criteria apply depending on the product line. These criteria pertain to controversial business practices as well as issues related to the endangerment of society and health, climate change, and biodiversity loss. In all our managed fund assets, manufacturers of banned weapons are excluded. In Swisscanto funds of the "Committed" variety, companies that generate more than 5% of their revenue from military equipment are excluded. Additional exclusions in the "Sustainable" category funds include, among others, the extraction of oil and natural gas. Customers have the choice.
But such long-term risks also present opportunities – because solutions to address them can offer growth over decades. Investments, if they are to benefit from such solutions, must also be geared towards a longer-term horizon. In our opinion, the "return question" for sustainable investments should therefore be framed differently. It should ask: how do sustainable investments perform in the medium and long term compared to conventional investments?
What the past teaches us about the oil and gas industry
As an asset manager with nearly three decades of experience in sustainable investments, we firmly believe that sustainably operating companies and countries enjoy competitive advantages in the long run. This is because they can more successfully integrate relevant current and future challenges into their strategies. They use their innovative strength to create environmentally and socially responsible products or services.
As a counterpoint, it is interesting to look at the two aforementioned economic sectors, whose products and services are generally considered less sustainable: the oil and gas industry and the manufacturers of defense and military technology.
While former US President Donald Trump promised a golden future for fossil fuels with the slogan "Drill baby, drill," the past has taught us otherwise: Measured by gross returns, the sector represented in the MSCI World Energy Sector lagged behind the global stock index MSCI World by an average of 5.3% annually over the past three years. Over the past ten years, the gap is even 6% annually (see chart below). Conversely, underweighting the sector resulted in corresponding outperformance relative to the global stock index.
This is despite the fact that, according to the International Monetary Fund (IMF), the sector benefited from an estimated USD 7 trillion in government funds over the past ten years. The oil price of USD 50 per barrel envisioned by Trump would require further massive subsidies. Currently, the breakeven price for US energy companies is at least USD 61 per barrel, according to the Dallas Fed.
Performance difference of the energy sector compared to the market (gross return p.a., in %)
Looking back further, until the outbreak of the Ukraine war, the exclusion of manufacturers of military equipment in a global equity portfolio had no impact (+0.01% positive contribution per year). Although European defense companies have significantly increased since the outbreak of the Ukraine war, the exclusion of defense manufacturers led to an annualized negative performance of -0.60% compared to the MSCI Europe. From 2014 to mid-March 2025 (see chart below), the performance impact in a global equity portfolio was still marginal at -0.04% annually.
Marginal performance losses due to exclusion of the defense sector (net return p.a. since 2014, in %)
Looking to the future, political pressure to increase defense spending could benefit the sector in the long term, especially in Europe. However, there are also risks from an investment perspective. For example, the planned rearmament in Europe is mainly financed by government budgets. It is therefore questionable to what extent the private sector can benefit in the long term, especially if the geopolitical situation stabilizes.
This brings us back to the question of the long-term returns of sustainable investments. From our perspective, caution is warranted with absolute answers. This is because the drivers of relative performance are often diverse. However, it is certain that this question has been of great interest to science and market research for years. As early as 2015, a meta-study published in the Journal of Sustainable Finance & Investment identified no fewer than 2,200 empirical studies on the impact of applied ESG criteria on the financial performance of companies. The finding: a majority of the studies found a positive impact. The meta-study also showed that the positive contribution has been stable since 1990.
Evaluating sustainability performance
Despite all the studies, "sustainable" remains a flexible term. We address this ambiguity with a clear methodology and transparency. We have developed an independent systematic sustainability approach, on which our active and passive Swisscanto investment solutions of the "Committed" and "Sustainable" varieties are based .
The consistent application of our sustainable methodology can pay off for investors, as demonstrated by the example of the two leading investment strategies Swisscanto (LU) Equity Fund Sustainable and Swisscanto (LU) Portfolio Fund Sustainable Balanced. The sustainable Equity Fund Sustainable has outperformed its benchmark by 1.55 percentage points per year over five years and by around 1.46 percentage points per year over ten years based on its gross return. For the Swisscanto (LU) Portfolio Fund Sustainable Balanced, the gross lead over the benchmark is 0.79% over five years and 0.56% over ten years.
A clear answer, then, to the question of whether sustainable investments outperform conventional investments in the medium and long term.
Legal disclaimer Switzerland and international
Legal disclaimer Switzerland and international
Historical performance is not an indicator of current or future performance, and performance data does not take into account commissions and costs incurred when issuing and redeeming shares.
Legal notices regarding the charts: MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.
Data as at 01.06.24
This document only serves advertising and information purposes, is for distribution in Switzerland only and is not directed at persons in whose nationality or place of residence prohibit access to such information under applicable law. Where not indicated otherwise, the information concerns the collective investment schemes under the law of Luxembourg managed by Swisscanto Asset Management International S.A. (hereinafter "Swisscanto Funds"). The products described are undertakings for collective investment in transferable securities (UCITS) within the meaning of EU Directive 2009/65/EC, which is governed by Luxembourg law and subject to the supervision of the Luxembourg supervisory authority (CSSF). This document does not constitute a solicitation or invitation to subscribe or make an offer to purchase any securities, nor does it form the basis of any contract or obligation of any kind. The sole binding basis for the acquisition of Swisscanto Funds are the respective legal documents (management regulations, sales prospectuses and key information documents (PRIIP KID), as well as financial reports), which can be obtained free of charge at https://products.swisscanto.com as well as at Swisscanto Fondsleitung AG, Bahnhofstrasse 9, CH-8001 Zurich (also acting as representative of the Luxembourg Swisscanto funds in Switzerland) or in all offices of Zürcher Kantonalbank. Paying Agent for the Luxembourg Swisscanto funds in Switzerland is Zürcher Kantonalbank, Bahnhofstrasse 9, CH-8001 Zurich. Information about the sustainability-relevant aspects in accordance with the Regulation (EU) 2019/2088 as well as Swisscanto's strategy for the promotion of sustainability and the pursuit of sustainability goals in the fund investment process are available on the same website. The sub-fund referred to in the document is subject to Article 9 of Regulation (EU) 2019/2088. The distribution of the fund may be suspended at any time. Investors will be informed about the deregistration in due time. The investment involves risks, in particular those of fluctuations in value and earnings. Investments in foreign currencies are subject to exchange rate fluctuations. Past performance is neither an indicator nor a guarantee of future success. The risks are described in the sales prospectus and in the PRIIP KID. The information contained in this document has been compiled with the greatest care. Despite professional procedures, the correctness, completeness and topicality of the information cannot be guaranteed. Any liability for investments based on this document will be rejected. The document does not release the recipient from his or her own judgment. In particular, the recipient is recommended to check the information for compatibility with his or her personal circumstances as well as for legal, tax and other consequences, if necessary, with the help of an advisor. The prospectus and PRIIP KID should be read before making any final investment decision. The products and services described in this document are not available to U.S. persons under the relevant regulations (in particular Regulation S under the U.S. Securities Act of 1933).
Data as at (where not stated otherwise): 11.2024
© Zürcher Kantonalbank. All rights reserved.
This document only serves advertising and information purposes and is not directed at persons in whose nationality or place of residence prohibit access to such information under applicable law. Where not indicated otherwise, the information concerns the collective investment schemes under the law of Luxembourg managed by Swisscanto Asset Management International S.A. (hereinafter "Swisscanto Funds"). The products described are undertakings for collective investment in transferable securities (UCITS) within the meaning of EU Directive 2009/65/EC, which is governed by Luxembourg law and subject to the supervision of the Luxembourg supervisory authority (CSSF).
This document does not constitute a solicitation or invitation to subscribe or make an offer to purchase any securities, nor does it form the basis of any contract or obligation of any kind. The sole binding basis for the acquisition of Swisscanto Funds are the respective published legal documents (management regulations, sales prospectuses and key information documents (PRIIP KID), as well as financial reports), which can be obtained free of charge at https://products.swisscanto.com/. Information about the sustainability-relevant aspects in accordance with the Regulation (EU) 2019/2088 as well as Swisscanto's strategy for the promotion of sustainability and the pursuit of sustainability goals in the fund investment process are available on the same website. The sub-fund referred to in the document is subject to Article 9 of Regulation (EU) 2019/2088.
The distribution of the fund may be suspended at any time. Investors will be informed about the deregistration in due time. The investment involves risks, in particular those of fluctuations in value and earnings. Investments in foreign currencies are subject to exchange rate fluctuations. Past performance is neither an indicator nor a guarantee of future success. The risks are described in the sales prospectus and in the PRIIP KID. The information contained in this document has been compiled with the greatest care. Despite professional procedures, the correctness, completeness and topicality of the information cannot be guaranteed. Any liability for investments based on this document will be rejected. The document does not release the recipient from his or her own judgment. In particular, the recipient is recommended to check the information for compatibility with his or her personal circumstances as well as for legal, tax and other consequences, if necessary, with the help of an advisor. The prospectus and PRIIP KID should be read before making any final investment decision.
An overview of investors' rights is available at https://www.swisscanto.com/int/en/legal/summary-of-investor-rights.html.
The products and services described in this document are not available to U.S. persons under the relevant regulations (in particular Regulation S under the U.S. Securities Act of 1933). Data as at (where not stated otherwise): 11.2024
© Zürcher Kantonalbank. All rights reserved.
