Business students today are developing a new vision of what capital markets and our financial system could, and should, look like. This was apparent at Yale School of Management’s Low Carbon Portfolio Case Competition and Responsible Investing Conference held this November. The competition, organized by SOM’s student-run Responsible Investing Group and sponsored by Commonfund, featured the work of student MBA teams from around the world who developed an environmental, social, and governance-focused (ESG) investment product for university endowments. Nearly 50 students making up 10 teams from top MBA programs participated. These students represent a growing class of future investment advisors, analysts, and policy makers who recognize that integrating ESG considerations into capital allocation decisions will help define the future of investing.
To date, a number of markers already demonstrate the progress toward sustainable, responsible and impact investing (SRI). There are upwards of 1,400 financial institutions that are signatories to the UN Principles for Responsible Investment. In addition, in 2014 the US Sustainable Investing Forum tallied $6.57 trillion in assets invested according to SRI strategies—18 percent of the total US-domiciled assets under management. These numbers demonstrate the growth in both the demand among investors and the tools investment firms have developed for integrating ESG considerations into investment vehicles. An important recent indicator of wider acceptance of SRI investing came this October when the U.S. Department of Labor overturned prior guidance that discouraged fiduciaries from considering ESG factors in their ERISA-compliant (retirement) portfolios.
Adding their own push to the growing momentum, each team at the Low Carbon Portfolio Case Competition offered solutions to and received feedback from investing gurus such as Charley Ellis of Greenwich Associates and Bob Litterman of Kepos Capital. Students also heard from a roster of SRI experts including representatives from the UN Principles of Responsible Investing, DBL Partners, MSCI ESG Research, and the Sustainable Accounting Standards Board. Finally, John Streur, President and CEO of Calvert Investments, closed out the conference with an inspiring keynote address.
As the head of a leading responsible investing firm, Streur called on decades of experience in the industry to connect students to a grander vision. Streur argued that ESG methods for investing, like those designed for the competition, are only one piece of the puzzle. He suggested that the real motivating challenge at hand is to “connect global capital markets to the business of moving society forward.” According to Streur, we are witnessing a powerful shift in societal expectations through demand for an end to externalities; people no longer accept the costless imposition of environmental or social costs by businesses. Ultimately, he said, SRI is about helping redefine the role of the corporation in modern society.
SRI achieves this by introducing society’s values for a better world into investing. SRI provides new metrics that identify high quality managers for all types of capital—human, financial, and natural—and moves assets in their direction. Streur said that in order to do this we must work within our “democratic global capital system” to ensure that these costs are incorporated into securities valuations. Among other things, Steur echoed other conference presenters in stressing the need for a corollary to the standardized financial metrics we use, like return on investment (ROI) and accounting ratios for inventory efficiencies. We must develop similar metrics for important non-financial factors; we must systematically collect and analyze this additional information to more properly gauge net benefits. He noted, in particular, the key role that regulators and organizations such as Sustainable Accounting Standards Board will play in ensuring this expanded vision takes place.
Facing a world of complex, even debilitating, social and environmental issues, the current cohort of emerging MBAs is motivated to address them. Some find it rewarding to tinker with a time-tested quiver of investment tools and see how they can be applied and altered to address new circumstances, while others feel driven by a sense of obligation to address the major problems of our time. However, together, there is a collective realization that issues across the three pillars, ES and G, are too great and too pervasive to ignore.