NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Wednesday, April 17, 2019

By Decio Nascimento

With Leonardo DiCaprio raising awareness on climate change, Emma Watson advocating for gender equality and Matt Damon co-founding a company to address water scarcity, sustainability has gone mainstream. So what has prevented this movement from extending further into the financial markets?

Let’s first look at what sustainability looks like in financial terms. In sustainable investing, the ideal scenario is when you find opportunities that produce the highest returns and have the highest positive impact.

However, more often than not, there is a tradeoff to be made. On one end of the spectrum, sustainable funds can be philanthropic, or impact-driven, meaning the fund will be maximizing for impact subject to profits. Conversely, hedge funds that integrate non-financial sustainability metrics into their investment framework will be seeking to maximize profits and fulfill their fiduciary duty subject to impact. Here, the byproduct is better risk-adjusted returns by incorporating more relevant information.

Photo courtesy of Véronique Debord-Lazaro.