In Spite Of Partisan Divisions In The US, Sustainability Remains A Core Driver

President Joe Biden is expected to veto a bill that prevents pension fund managers from considering climate change when making investment decisions.

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The bill, which was passed by the Senate on Wednesday after two Democrats joined Republicans in supporting it, illustrates the potential for partisan divisions to stifle the sustainability agenda. As a result of a decision by the Biden administration to implement environmental, social, and corporate governance (ESG) considerations into the allocation of capital and the shareholders' vote, the bill was drafted as a response to the decision.

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Financial returns on investment must be the primary criterion, according to backers of the resolution. ESG issues will not be excluded from consideration altogether, they say. President Biden, however, has stated he will veto the bill, but the White House says he will not do so.

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Despite the fact that the conflict highlights how crucial it is for investors to consider the ESG performance of companies when making investment decisions, it remains politically contentious. The issue of sustainability, however, is becoming increasingly important to investors as a guide.

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For investors, sustainability can serve as a useful indicator of how well a company is performing. Numerous studies have shown that companies that manage sustainability issues well tend to perform better than those that do not. A firm that manages its business, stakeholders, and environmental impact well should also be well-positioned to achieve financial success. The research has also shown that successful engagement of ESG issues is associated with strong investment returns. On a five-year and a ten-year basis, MSCI ACWI ESG Leaders have outperformed global equities (MSCI ACWI Index) in terms of average annualized returns, as well.

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There is a wide range of opportunities available at SI. As investors began to leave growth-oriented sectors in favor of value-oriented sectors earlier in the year, certain parts of the sustainability investment universe underperformed last year. As a matter of fact, we believe the volatility among growth companies reflects more the importance of portfolio diversification than it does the SI approach itself. Among the many value-oriented opportunities that we see, we can mention the food supply chains, waste management, and recycling as a few examples. The Rockefeller Improvers ESG Index, which measures the social and environmental impact of equities, has outperformed the Bloomberg US 3000 Total Return Index over the past five years by two percentage points each year.

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Fund flows to sustainable strategies are resilient, demonstrating the investors' commitment to these strategies. There has been a noticeable increase in sustainable fund flows over the course of 2022, according to Morningstar. The growth in sustainable fund assets was particularly evident in the fourth quarter, when they grew 11.6% over the previous quarter, almost twice as much as the growth in the broader market. It has been noted that in Europe, "dark green" funds (those with sustainable investment as their main objective) have experienced continuous inflows throughout the entire year, indicating a strong investor commitment to sustainable investment.

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Despite strong capital commitments from both governments and businesses, we remain convinced that sustainability should be a key long-term driver of investment returns due to strong capital commitments from both parties. The circular economy, clean air and carbon reduction, smart mobility, and energy efficiency are some of the themes in which we see opportunities for investors and recommend that they diversify across sectors, styles, and asset classes.