Markets In Action

Profits with Purpose: Can Sustainable Investing Harness Markets to Solve Social Problems?

Is it possible for investors to do good while doing well? According to Audrey Choi, the answer is “yes.”

Choi, CEO of Morgan Stanley’s Institute for Sustainable Investing, makes the case for harnessing the power of finance to address key public policy challenges, such as protecting the environment, fighting pandemics, reducing inequality and other social needs.
“Sustainability” here is defined as “a commitment to economic, social and environmental well-being for both the present and the future, balancing society’s needs today with the demands of tomorrow,” according to a Morgan Stanley report published in January. In her work, Choi seeks to reconcile that commitment with the world of investing-an approach she says will bring big returns, in more ways than one.
In her November, 2015, TED talk presented at TED@StateStreet Boston, Choi argues that “the institution of the global capital markets, the nearly $290 trillion of stocks and bonds in the world…may be one of our most powerful forces for positive social change at our disposal-if we ask it to be.”
Choi notes that the biggest obstacle to sustainable investing may be the skepticism that many investors feel about applying their values to their portfolios:
Many people think of the capital markets kind of like an ocean. It’s a vast, impersonal, uncaring force of nature that is not affected by our wishes or desires. So the best that our little savings accounts or retirement accounts can do is to try to catch some waves in the good cycles and hope that we don’t get inundated in the turbulent ones. But certainly, our decisions on how to steer our little retirement accounts don’t affect the tides, don’t change the shape or size or direction of the waves.
But why is that? Because, actually, one third of this ocean of capital belongs to individuals like us, and most of the rest of the capital markets is controlled by the institutions that get their power and authority and their capital from us, as members, participants, beneficiaries, shareholders or citizens. So, if we are the ultimate owners of the capital markets, why aren’t we able to make our voices heard? Why can’t we make some waves?
Choi notes that interest in sustainable investing is growing. She cites polling data that suggest people are prepared to harness the power of markets to address social challenges: 71% of respondents in one recent survey expressed interest in sustainable investing, even though more than half believed that a sustainable portfolio meant a financial trade-off.
This “either/or” proposition is in fact a false dichotomy, Choi argues. She cites a recent Harvard Business School study, which followed up on research from the Brookings Institute, that found that a dollar invested in a portfolio of companies focusing on social and environmental goals as well as business growth and solid performance could have grown to $28.36 over a two-decade period-compared with just $14.46 for a similar portfolio of companies that focused primarily on quarterly earnings over the same duration. With time, she suggests, such a focus on business expansion and pursuing social goals could become “the new normal” for investing.
Choi is one among a growing chorus of voices promoting sustainable-investing practices as an alternative model. If you believe that there’s a place for sustainable investing in your portfolio, ask a financial professional for advice on how to get started.
What’s most intriguing about Choi’s presentation is her creative vision of capital markets as a force for positive change. It’s a vision that could open new paths to solving some of the world’s most intractable problems, beyond the typical approaches of government mandates, regulations and bureaucratic programs. That’s a valuable message more people should pay attention to.