Increasingly more people realize that their sustainability concerns can be address through their investments. As more investors embark on the sustainable investing journey—learn what it is, why one pursues it, and how to do it—assets into sustainable funds will continue and investors will have more choices from which to construct sustainable investing portfolios.
Individuals and institutions are increasingly concerned about sustainability issues. A World Economic Forum survey from the fall of 2020 concluded that 79% of American respondents agreed with the following statement: “I want the world to change significantly and become more sustainable and equitable rather than returning to how it was before the COVID-19 crisis.” We take a look at the growth of investor interest in sustainable investing while answering some common questions about it.
What is Sustainable Investing
You may have heard various terms used to describe sustainable investing—socially responsible investing, ethical investing, impact investing, among others. Although each of these terms is relevant to specific financial industry actors, types of clients, investment strategies, or subsectors of activity, they fundamentally describe the same thing:
Investments made with the intention of generating a positive environmental, social, and governance (ESG) impact alongside a financial return.
Investors commonly use sustainable investing to pursue two overarching goals:
- To protect and enhance long-term financial value through addressing ESG risks or investing in solutions to solve environmental and social challenges.
- To protect, enhance, or otherwise positively impact the long-term health of the environment or society through expressing ESG values.
Some examples of ESG issues that may be considered in an investment strategy:
Environmental: Greenhouse gas emissions, energy management, and water and wastewater management.
Social: Access and affordability, labor relations, and diversity and inclusion.
Governance: Compensation and benefits, data security, and supply chain management.
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IMPORTANT DISCLOSURES
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
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.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
US Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio.
Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.
All index data from FactSet.
Please read the full Outlook 2021: Powering Forward publication for additional description and disclosure.
This research material has been prepared by LPL Financial LLC.
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