Sustainable Investing

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 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.  These strategies are ordered by the level of intensity of the ESG (environmental, social, governance) factor consideration in the overall investment process.

1. Exclusionary Screening – Avoiding investments in companies or industries on the basis of moral values and standards (i.e. tobacco) and social norms (i.e. human rights), historically referred to as SRI.
2. Best in Class Selection – Selecting securities based upon strong or improving ESG factor issues relative to the company’s industry partners.
3. Active Ownership – Entering into a dialogue with the management teams of the portfolio holdings on ESG issues, and exercising ownership rights (i.e. voting proxies, submitting shareholder proposals) to promote change.
4. Thematic Investing – Focusing investments on specific environmental or social themes, such as clean energy, water, education or health care.
5. Impact Investing – Selecting securities to promote social and environmental benefits in addition to earning a financial return.
6. ESG Integration – Systematically integrating ESG considerations, where material, into investment due diligence and financial analysis.

^{Source:  LPL Research, CFA Institute, “Environmental, Social and Governance Issues in Investing: A Guide for Investment Professionals,” 2015.}

^{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.}