Sustainable investing is an important topic for today’s Masters in Finance students and graduates.
Between 2012 and 2015, companies given the highest ESG (environmental, social and governance) rating by MSCI-KLDe performed around 40% better than the companies in the lowest rating, according to a study by Nordea Equity Research.
In light of these results, and increasing demands for sustainability and social responsibility from the public and investors alike, a growing number of employers are demanding ESG awareness from their staff, says Dr. Bruno Gerard, professor of finance at BI Norwegian Business School (BI).
“There’s been a sudden and dramatic demand from both industry and students to provide [ESG] guidelines,” Bruno observes.
This demand may be especially prominent in Norway, often seen as a global leader when it comes to ethical investment. Norway’s Government Pension Fund, for instance, has the power to sell stakes in companies that do not comply with its ethics guidelines.
At BI, several ESG-related classes have been added to the Master’s in Finance curriculum in the last year, and a whole new program in sustainable finance is being considered.
The goal of such classes is to help graduates enter finance roles with a deeper understanding of the ESG landscape. One important part of this will be recognizing the challenges they'll face while integrating sustainability and social responsibility into investment and corporate finance practices.
Below are three important challenges that today's Master’s in Finance students and grads should be aware of, and how they could be tackled.
1. Defining sustainable investing
For Bruno, one of the main challenges to sustainable investing is the fact that there isn’t yet an agreed upon definition.
‘Sustainable investing’ tends to be a catch-all term for attempting to tackle large-scale social and environmental issues through strategic investments.
In theory, investing in organizations that create positive change can help to build a more ethical business landscape. In practice, though, things aren’t so simple.
“That’s part of the area that’s exciting, and still quite unsettled,” Bruno reflects.
Attempts have been made to quantify what makes an ‘ethical’ or ‘unethical’ investment through ESG scores, but scores from different sources often contradict each other.
“When it comes to responsible investment and sustainability, many managers and companies are not very well informed— they’re still groping in the darkness,” Bruno believes.
“We need to find a broad consensus on what defines a more or less attractive investment based on those dimensions.”
2. Being ‘stuck’ with companies
Defining ‘sustainable investment’ isn’t the only challenge to portfolio managers hoping to support ESG initiatives, Bruno says.
For one thing, it’s not often possible to avoid investing in a company due to poor ESG scores alone. “Large investors, like pension and sovereign funds, can’t exclude that many companies,” he explains.
“They can exclude extreme misbehavior, but they can’t exclude the majority of companies, and are ‘stuck’ with their investments for a long time.”
The solution, Bruno believes, is for funds to work with these companies on their ESG performance. This will involve engaging with managers to put ESG policies in place, and defining realistic goals to aim for.
Research has shown that local interventions are often the most effective.
"Evidence shows that management doesn't respond well to engagement from investors that are not from their cultural or local environment," he explains. "It's quite striking that although we're in a global world, it's still very local in the way we respond to input and suggestions."
3. Unfocused attempts at change
“The evidence to date suggests that coordinated efforts from large institutional investors can prod many companies in the right direction,” Bruno says.
Without a specific goal in mind, though, these efforts can do more harm than good. “Companies and management that engage in indiscriminate attempts to improve social effectiveness actually perform more poorly than companies that don’t attempt anything,” Bruno says.
“You can be a perfect company in social terms, but then you’re going to be a bankrupt company.”
Instead, he explains, management teams must choose their priorities and strike a careful balance between firm profitability and ESG investments.
Business schools have a role to play in developing finance professionals with a strong understanding of ESG and of the balance between corporate success and social responsibility.
“The management [of BI] understands there’s a demand, and there is a need to develop those things very quickly, to be on the forefront of delivering these skills to the market,” he says.
The future of sustainable investing
Despite these challenges, Bruno believes that sustainability is set to become fully integrated into the world of finance and investment—including being taught in the business school classroom.
“I think that in 10 years, we won’t have a specific Master’s in Sustainable Finance,” he predicts. “We won’t need to put it in the title because it will be automatic.”
Although business schools have a role to play, he cautions that developing socially responsible and sustainable investment practices will be a joint effort.
“We need both pressure from the public, elected officials and investors as well as engagement with managers,” he says. “The best we can do [as a business school] is help.
“It’s a great time to try and provide tools for a new generation of managers to help companies improve their ESG footprint,” he concludes.