The idea of sustainable investing is not new, and many investors relate the term to socially responsible investing (SRI), which is an investment strategy that excludes companies and industries on a basis of moral values (e.g. alcohol consumption, gambling). This type of strategy still exists, but it is important to note that sustainable investing has evolved beyond emphasizing exclusionary screening based on a narrow range of criteria. Today, greater emphasis is placed on which companies to include, rather than exclude, from a portfolio, giving rise to a range of complementary approaches that can be used to implement sustainable investment strategies.
Sustainable investing continues to gain steam globally, with assets under professional management totaling $22.9 trillion, as of the end of 2015. Although more than half of these assets are in Europe, sustainable investing has also grown tremendously in the United States in recent years, with assets under professional management more than doubling from 2012 to 2016. Many forces are driving this growth, including increased awareness that ESG factors have a positive impact on performance and changing demographics, as millennials consistently express greater desire for some sort of sustainable investing solution. Also at work are changing social norms and the political polarization in the United States, leading some investors to want to see their social views represented in their portfolios.
Despite the tremendous growth, some investors and financial professionals are skeptical of sustainable investing because, intuitively, shrinking one’s investable universe could make outperforming the market more difficult. However, researchers from the University of Oxford and Arabesque Partners aggregated over 200 studies globally analyzing this claim and found the following:
Given these results, we believe investors should not think of sustainable investing as shrinking the investment universe, but rather focusing on companies within that universe that may provide the best prospects. As investors continue to seek out sustainable investments, they are actively encouraging companies to improve their ESG scores. Thus, investing in these types of companies may result in better corporate governance, greater regulatory compliance and other positives.
In our view, analyzing a company’s ESG factors as an integral part of traditional financial analysis can add value to investors’ portfolios. As more information and products become available, we anticipate that these ideas may become even more widely accepted, perhaps to the point where they are standard considerations for most investment managers, making it much easier for investors to implement a portfolio that reflects their values.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly.
Investing in specialty market and sectors carries additional risks such as economic, political, or regulatory developments that may affect many or all issuers in that sector.
This research material has been prepared by LPL Financial LLC.
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