Sustainable Investing LPL Financial

Strategic Discovery: Sustainable Investing

May 11, 2017

LPL Research

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).

An energy company fails to uphold sound health and safety standards…

In 2010, while in the Gulf of Mexico, one of the company’s oil rigs suffers a massive explosion. Shareholders lose 50% of their value in the following three months.

The Board of Directors of a telecommunications company does not enforce sound accounting practices…

In 2001, the company’s internal audit department uncovers extensive fraudulent accounting practices that result in the company’s bankruptcy, the largest in U.S. history at that time. Shareholders lose an estimated $180 billion.

A New Jersey based utility develops new technology that enables the company to efficiently service drought-stricken western states that previously were not cost-effective areas…

 

The technology enables growth that translates to a 242% increase in the company’s stock price over the next eight and a half years, compared to a 60% increase in the S&P 500 Index and a 23% increase in the utilities sector over the same period.

These particular issues are examples of environmental, social, and governance (ESG) factors. The deliberate practice of incorporating ESG factor analysis into traditional financial analysis is referred to as sustainable investing. Not all examples of ESG factors will be as significant as those above, but they may not need to be in order to have relevance. According to industry experts at the CFA Institute, “systematically considering ESG issues will likely lead to more complete analyses and better-informed investment decisions.”*

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.

Learn more about sustainable investing strategies.

 

*CFA Institute, "Environmental, Social, and Governance Issues in Investing: A Guide for Investment Professionals," 2015.