stainable investing is an umbrella term used to describe a broad range of investment approaches that seek competitive financial returns and methodically considers environmental, social, governance (ESG) risks and opportunities in the investment process.
The benefit of sustainable investing is that it's an investment approach that offers investors an opportunity to invest in innovative companies that are seeking better ways of doing business and are intentionally trying to manage their environmental and social risks.
This investment framework provides greater transparency about how and where money is invested while assigning asset managers a stewardship role to hold investee companies accountable to improve their ESG impacts.
Terms such as socially responsible investing, ESG investing, and impact investing all fall under the sustainable investing umbrella.
But it’s ESG investing that is driving the mainstreaming of sustainable investing.
ESG investing is an approach to managing assets where investors explicitly acknowledge the relevance of ESG factors in the investment decision-making process.
ESG investing aims to correctly price ESG risks and opportunities.
While the first sustainable investing mutual fund was launched in 1971, the ensuring 50 years has seen remarkable growth and evolution.
Rationale for the growth and evolution
1 Global Sustainable investing Review: 2020. 2021. http://www.gsi-alliance.org/wp-content/uploads/2021/08/GSIR-20201.pdf2 Morgan Stanley. Sustainable Signals 2019. https://www.morganstanley.com/pub/content/dam/msdotcom/infographics/sustainable-investing/Sustainable_Signals_Individual_Investor_White_Paper_Final.pdf3 Friedberg, Rogers, and Serafiem. How ESG Issues Become Financially Material to Corporations and Their Investors. 2020. 2020. https://www.hbs.edu/faculty/Pages/item.aspx?num=571614 Amel-Zadeh. Why and How Investors Use ESG Information. 2017. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2925310
Sustainable investing is subject to numerous risks, chief amongst them that returns may be lower than if the Financial Professional made decisions based only on investment considerations.
Socially Responsible Investing (SRI) / Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.
LPL Financial offers a variety of sustainable investing choices, ranging from exchange-traded funds (ETF), mutual funds, separate account managers, and centrally managed turnkey portfolios. LPL Research provides due diligence and recommendations for third-party investment managers that are also sustainable investing leaders.
The LPL Research MWP Sustainable Investing—ESG model is available for Model Wealth Portfolios (MWP) and has three main criteria for investment companies:
As part of the MWP suite, LPL Research proactively manages this strategy and will use market dislocations to rotate into higher conviction ideas at times of weakness.