Sustainable Investing / Portfolio Theory
Analyzing Literature Review on Sustainable Investing
Sustainable investments define the nature of many business operations today. Adopting sustainable investment is the focus on the areas of environmental improvements, the social focus on the local community and the call to have prudence in the business governance for profitability. Business organizations need to adopt standards that would make their operations futuristic. The ESG (environmental, social and governance) sustainable standards also increase the profit leverage for the business organization. As a result, it always calls upon the management of every business that aims to remain profitable in the long run to tailor its operations towards the achievements of sustainable goals. This paper looks into the conceptual development of business sustainability development and focus. The paper takes the form of literature review explorations attempting to confound knowledge from different published sources. The paper explores key areas of sustainability including SRI and impact investments. The paper also explores the portfolio management theories and measurements. The conclusive summary highlights the key knowledge developed through the literature review report.
Every investment is futuristic in nature; this means that they are made with the need to have sustainability. They are supposed to remain relevant and viable over a long period of time. They are important if they exploit opportunities available to make them useful and relevant in the long run. Though they should give returns to the owners in the longest time possible, some may vary depending on the focus of the business and the nature of the industry. Some may last as long as they are still relevant and once their relevance fades away, they become less socially supported. On the other hand, some can change their focus through the development of business process engineering and business continuous improvements. Some can be realigned to meet market needs, thus they remain relevant. Business opportunities that can change with the changes in the customer focus are likely to remain relevant and sustainable. They can be sustainable even when the business organizations are not making much profit due to economic challenges in the industry and in the market. However, the most appropriate way in which business organizations make profits is through the development of a focus on the use of sustainable investing.
Sustainable Investing Definition
Sustainable investing is the deliberate actions undertaken to ensure that business organizations ventures ascribe to the provision of the environmental values in its area of operations, social values as well as governance values (Kates, 2018). Three key valuation points for any business are therefore christened as ESG. The development of business organizations that conform to the environmental, social and governance values are aimed at improving the futuristic prosperity of the business organization. Business organizations that need to remain relevant and perpetually profitable in the future must always find solutions that conform to the ESG areas. The business organizations must be able to offer solutions that are environmentally safe, solutions that are socially accepted and the organizations must show prudence in management to realize the definition of ESG. Kates, (2018) further notes that ESG is a generic term used in capital markets by investors to evaluate corporate behavior and to determine the future financial performance of companies (Kates, 2018).
Developing sustainable in business operational focus that would achieve the status requirements of ESG calls on the business managers to develop and adopt industry standards that would help in such achievements. Business organizations that are able to exploit the standards in place to develop sustainable business organizations that meet the requirements of ESG are able to operate in the long run (Gore & Khoper, 2015). Such business organizations are environmentally conscious. They are businesses that exploit every area of operations with an aim of ensuring a better environment itself and the community. According to Kates, (2018), ESG business organizations do not indulge in any form of pollution in the environment. They ensure that any byproduct or activity they undertake that might pollute the environment is properly handled and recycled where possible. Gore & Khoper, (2015) also report that such businesses also seek to improve the environment to be better than they found it. Since they have a role to play away from the major focus on profitability, the community will always find a reason to support such business organizations unconditionally. As a result, they are able to translate the unwavering customer trust and support into a business venture that would ultimately lead to the self-sustaining system (Gore & Khoper, 2015).
Understanding the sustainability of business organizations also requires management to plan for, deploy and achieve the need for the social domain in the business operations (Hahn et al., 2015). A social domain is the ability of the business organizations to identify and respect the cultural values and set up of operations. Hahn et al., (2015) further posit that social domain is useful in ensuring that there is the integration of the community cultural requirements in the business operations. The society makes up the customers of the business. A business that does not give the society what society needs is bound to be irrelevant. According to research studies by Trainer et al., (2014), the development of a cultural and social understanding of customers is vital in ensuring the customers achieve what they need. Further, it would be useful to note that being more customer-focused involve evaluating what the customers need socially and culturally and availing the needs in the most appropriate way. A business that informs, transforms with and adopts the culture domain of the customers is able to achieve a long-term support from the community, hence sustainability (Trainer et al., 2014).
But the business governance, the prudence in management as a domain, is also very vital in the development of a business venture. For instance, a business can only be sustainable if it can make profits from its operations. As noted by Kates, (2018), a business that makes perpetual losses cannot attract efficiency and continuity in its operations. Therefore, it is always important that every business organization management carry out risk identification and mitigation factors that may ensure the business operates with favorable balances in its books of accounts.
Kinds of Sustainability of Business Organizations
Sustainability of businesses that ascribe to the ESG standards is a basic form of suitability development. Careful analysis of the sustainability values developed by Ravalli and Viviane, (2015) shows that the need for sustainability can also be more specifically explained through the use of socially responsible investing (SRI) and through impact investment. Both have one common foundation of ensuring the business remains relevant, viable and profitable in the community in the long run (Ravalli and Viviane, 2015).
The socially responsible investing is the development of a deliberate action to focus on the investment options in areas where the society would approve. Ravalli and Viviane, (2015) noted that investment options in areas that would contravene the needs if the society is avoided. Having rapport between business organizations and the community is an important way in which the business can be assured of the community support at all the time. As such, the business remains relevant through the years. Such business organizations become sustainable in the long run. They earn the local community support through the developed rapport and thus it realizes a continued revenue system (Ravalli and Viviane, 2015).
The development of sustainable investment is the new frontier of the organizational operational model. Most business organizations are committed to the achievement of the courses of action that aim to develop sustainability. Trainer et al., 2014, recalled that business organizations that have been committed to the given courses, therefore, need to adopt the kinds of standardizations in the industry. Various procedures would be ideal for the realization of the business process development in the industry, with an aim of achieving the needed sustainability. The focus, however, varies from business to business and from industry to industry. This is what Kates, 2018, meant by noting that business that achieves sustainability through the ESG model aims to remain most sustainable as they offer tree key areas of sustainability. Though it is not always possible to successfully achieve the targets of all the three concepts, the challenge that arises may make a business to focus on a given area of sustainably. This has seen the rise of business organizations that achieve sustainability through the use of Socially Responsible Investing (SRI) or through the use of impact investment (Kates, 2018).
The Scope of Sustainable Investments
Sustainable investment is important in the development of business successful framework design (France et al., 2017). There is a need to have a higher rate of business success in the key areas of sustainability that would lead to the achievement of the key variable in sustainable concepts. For instance, the businesses that focus on its sustainability need to develop social criteria in its work delivery charter that would examine its relationships and networks in the community. Accordingly, France et al., (2017) reported that there is an increasing need for the business organizations to examine and evaluate its relationship with its stakeholders, including the employees, the customers, and suppliers. Most importantly, however, every business must examine and moderate the way in which it operates and relates to the community (France et al., 2017). The community provides a set of the business public that cannot be easily controlled, but the business manages. France et al., (2017), concluded that this is the reason why it would be important to identify the key issues that the business must tackle when it needs to be sustainable. Sustainability, therefore, can be addressed through the development of environmental solutions, social solution or even profitability solution.
The scope of sustainability in impact investments and socially responsible investing, (SRI) however takes different forms as it aims to concentrate synergies for the attainment of key sustainable goals. The SRI investment aims benefits the community as a whole because the business organization can consult with the community stakeholders to determine the need for the successful development of socially viable solutions (Grayson & Hodges, 2017). The success of the sustainability in any business modeling will largely depend on the manner the company planned for the attainment of the desired goals and objectives. Further, it is possible to achieve the desired kind of sustainability if there is adopted standards that would define and improve the level of business success in the areas of sustainability requirements (Grayson & Hodges, 2017).
Background of Sustainable Investing
Sustainability in the development of business organizations is as also as old as the need for the business organizations themselves (Paetzold & Busch, 2014). Before the development of the formal business organizations, the need to have sustainability was already in existence. The explorers and the missionaries carried along with them specific messages that they preached to their faithful. For instance, the Christian missionaries had informed opinions in the kind of behaviors that the people who bought their messages would abide. One of the teachings they made was on the kind of relationship living that was expected between brethren. There was a need for good social behavior. According to Paetzold, Busch, and Chesney, (2015), People were required to show good deeds and good behaviors to their neighbors and other community members. Therefore, according to the teaching of the early missioners, doing ethically considered wrong business was not acceptable. As a result, people became cultured that some kinds of behaviors were bad and others were approved. Investing in activities that would jeopardize the missioner’s teachings was not acceptable. Investment in liquor, drugs, and exploitation of other people in business quotas were activities that were considered unethical. When the teachings settled down on people, it became apparent that business investments would follow a given pattern (Paetzold & Busch, 2014).
Right from the time of industrial revolution where initial organizations were being crafted, there was the need for successful sustainability in the business organizations (Brockhaus et al., 2017). For instance, the exploitation of nonrenewable resources saw managers in corporate management strategize in their operations that aimed to streamline exploitation and success in their use. For instance, it became apparent that human resources and time were very perishable resources needed for successful production. According to Brockhaus et al., (2017), even management strategies focused on the improvement of the utilization of an organization’s human and time resources. The use of scientific management, humanistic theories and other theories of motivation like Maslow’s theory all aimed at creating efficiency in one resource or another. At some point, people needed to ensure efficiency in the utilization of resources. Though they were not directly aimed at ensuring business sustainability, they provided the foundation’s thoughts in need to have a deliberate action that would make business sustainable in the long run (Brockhaus et al., 2017).
Through the development of history, changes have been brought into the business management that has pointed to the sustained need for business sustainability (Paetzold & Busch, 2014). Cultural values that were considered ethical were sustained and the other values that were considered non-ethical were shunned. Though such activities were undertaken as good practice, they offered the need to have a standardized model for business sustainability. The realization of the business success in the broader operational environment has further called for the need for sustainability (Paetzold & Busch, 2014). Today, businesses need to be futuristic apart from showing a strong sense in the market does not guarantee business future success (Kates, 2018).
Innovations and knowledge development ideas keep cropping up and even a reliable business with a strong sense of success can fall into oblivion because of simple mistakes it commits in the market (Ismail, 2014). This is what befell such market industry leaders like Research in Motion with their brand BlackBerry phones. The same case has also manifest in other leading brands like Siemens mobile phones, Motorola and many other initially leading businesses that fell lower in the pecking order in terms of viability (Tumor, 2014).
The Status of Sustainable Investments
Developing business sustainability has not been a walk in the pack. Many business organizations have attempted to realign their operations to fit the social, environmental and profitability models, but little has been achieved. In modern society, and especially in the European markets, the need to have a focused commitment to the triple-bottom-line is the lifeline of many business organizations. The businesses that operate in the market commit to the triple-bottom-line standards that aim to give them futuristic ideas (Grayson & Hodges, 2017). In European markets, the triple bottom line means that business organizations need to commit to succeed in the people, planets and profit aspects. Each of these areas takes time to address vital elements in the society that attempts to make the business organizations sustainable and still viable in the future through relevance (Grayson & Hodges, 2017).
Comparing the triple-bottom-line to sustainable investment requirements, one sees little difference. In the triple bottom line, there is a need for the development of a strong commitment to the elements of the planet in the operations of any organization. Likewise, in the call to have a sustainable investment, there is a need to have the environment investment prudence (Serkis & Davila, 2015). The environmental focus in both cases is basically the same. It is the call to have the business operations progress towards environmental conservation and preservation. Environmental conservation is the element that calls upon the business organization to join the course of environmental goodwill. The preserved areas should not be destroyed further. The business organizations should, therefore, avoid participating in activities that would deteriorate the environment in which they operate. Further, the call to have the environmental preservation means that the business must carry out all that is possible to improve the environment in which it operates (Serkis & Davila, 2015).
On the same note, Triple bottom-line requires the business organizations to commit to people improvements. The call to focus on the people goes beyond addressing the customer focus elements in the organization, to a mutual understanding of the community (Device, Jamarion, & Nourbakhsh, 2014). The business organizations operating under sustainable investment options and use under triple bottom-line find the need to have community cultural practices applied in the business. Business organizations, therefore, need to identify the key issues that might be trivial in the community and avoid them in a way not to disadvantage any part or group of the community. Social and cultural valuations by the business form a significant aspect of strategic planning and development.
Finally, the triple bottom line requires the business organization to focus upon and realize profits in their operations. The same call is made for the business organizations that need to operate under sustainable standards. According to the research report by (Bryson, 2018), the call to have the business organizations committed to the development of success in the planning price setting to create profits is vital. For instance, there is no business that can be sustainable perpetually if it remains to post negative profits or losses. Such business must be disbanded and exit strategy clauses evoked to dissolve their existence. Therefore, in as much as the business organizations may still be committed to achieving the environmental and people aspect, the ultimate call to be profitable must still be maintained (Bryson, 2018).
The challenge that exists in the development of the business call to profitability through sustainability has also been achieved through the development of Corporate Social Responsibility (CSR) activities (Schäfer, 2016). Some corporations have given a lot of financial, time and other resource commitment to improving the living standards of the communities it operates. The difference between Corporate Social Responsibility (CSR) and the need to have sustainability or triple-bottom-line is that the business does not have it as the main area of operation. It is done as an additional part-time activity that helps in creating rapport with the community. However, its success has been questioned. The fact that business organizations do not have Corporate Social Responsibility (CSR) as their core mandate makes it optional (Schäfer, 2016). Organizations can, therefore, avoid undertaking Corporate Social Responsibility (CSR) activities if they feel it would not have sufficient impact. However, when undertaken as part of sustainable programs then Corporate Social Responsibility (CSR) can be a useful avenue to achieve business successful operations in their markets.
Determining Whether an Investment Is Sustainable
From an investor’s perspective, sustainable investments are better than traditional investments because of the ranking and exclusion methods. Since sustainable investments can be ranked based on proven scientific formulas, they offer a better understanding of the investments portfolio compared to the traditional investments. Therefore, the investors can use exclusion method to avoid those business organizations whose returns are uncertain. As the certainty of the investments is proven, it becomes useful that the investors consider the investments with higher certain returns in the face of risk factors. Ranking of the investments with basic formulas like Sharpe and informational ratios are useful ways in which the value of the investments can be determined, ranked and chosen by the investors.
As companies attempt to develop suitability in their operations, it is always useful to provide a raking index. To rank companies based on their commitment to sustainability, the index is to show which one is most sustainable and which one is lest sustainable. Such ranking must be undertaken using reliable instruments (Bryson, 2018). The evaluation, measurement and ranking instruments must be deemed credible, reliable and without possibilities of repudiation. Moreover, there is a need to have consistency in the ranking process. The need to have quality reporting structures of the ranked figures are important ways in which the organizations can be able to address the key challenges that may arise in the assessment of their suitability index.
There are organizations accredited with the work of measuring, ranking and reporting the efforts by companies to be sustainable (Bryson, 2018). Such financial companies have been accepted universally as most reliable in the assessment of the organizations can be attained. One of the organizations charged with the responsibility to undertake the vital role is Morningstar. As a financial company without cases of poor performance, MorningStar offers a quality rating and reporting services for the sustainable company that needs to be ranked.
The Morningstar Sustainability Rating is focused on the measurement of the organizations based on their portfolio. The Morningstar is useful in providing a quality measure of how well the holdings in a portfolio are performing in the industry. To measure such variables, the rating agency must ensure the kind of managing structures at the organizations of interest. Their environmental, social, and governance or ESG, risks, and opportunities relative to other competitors must thus be addressed and reported to the general public for the development of decision-making processes.
Difference between Sustainable Investing and Impact Investing
“Impact investing” moves beyond the simple declarations to investors to be ethical to a more specific focus on investment needs. The impact investment primary goal is to make a positive difference in the world, and not simply through choosing the areas of ethical investments, but by creating solutions with immediate benefits (Eccles, Ioannou, & Serafeim, 2014).
On the same note, impact investment becomes more specific by looking at the manner in which the section and screening of the investment options are developed based on the need to have influence in the community (Eccles, Ioannou, & Serafeim, 2014). Impact investments focus on the advancement of funds to a company that aims to create a specified impact in the community. Impact investment therefor can be advanced to the business organizations that plant trees as a way of environmental conservation. When such fund is advanced, they are meant to further the interest of the funding agency (Eccles, Ioannou, & Serafeim, 2014). There are no criteria that the funded organizations go through once it is selected as a possible recipient of the funding needs. Impact investment concentrates effort in a selected area and thus leverages the achievement of the selected values and goals in the community. Businesses that receive impact funding must have demonstrated total commitment to the identified course. It is, therefore, less expected that such business organizations can change the course of their operations to focus on other items (Eccles, Ioannou, & Serafeim, 2014).
Business investments are based on risks. In many cases, the higher the risk, the higher the possibilities of returns. The lower the risk of investment, the low the possibilities of making any meaningful gains from the investment (Bilbao-Terol et al., 2016). This is a general principle in business, but it has exceptions through. Nonetheless, it is always important for business investors to accurately ascertain the possible contributions of risk to their possible gains or losses. Through the use of portfolio theory, the investors find an opportunity to vary their investment risks and consequently understand and display their level of possible income (Bilbao-Terol et al., 2016). The idea is to ensure that the risk is minimized and the gains are maximized. When the investors deploy the portfolio management theory, there is a need to ensure that the gains are maximized ad the best optimum level of risk is reached that give the most returns. When the portfolio management theory is deployed, an empirical mathematical model helps in clarifying the accuracy of the decisions making concerning the investment (Bilbao-Terol et al., 2016).
The portfolio theory also called the asset mean-variance analysis is a set of mathematical symbols, tools, and formulae that are used to analyze and manage invested assets in a portfolio with an aim of maximizing the return and moderating the risks (Hua et al., 2015). When using the portfolio management theory, it is useful to note that the business under review is always not considered individually, but collectively in the industry. Portfolio management, therefore, is the act of combining analysis of several assets in the industry to determine their investment health. As such, it is always using that the asset managers for portfolio managers have the right mathematical models that can achieve the successful analysis of the presented cases. The weighted averages of the asset portfolios in the analysis should be the average returns of all the assets under review (Hua et al., 2015).
Risk Measurements and Parameters
There are different parameters that can be used to measure the success of the portfolio in an investment forum (Davis, 2014). Among the measurement parameters of a portfolio, program include historical volatility of such kind of investments, the presented rate of return on the investment and the expected return from the investment. Moreover, it is useful to note that there is a need to consider the risk severity and the risk propensity when determining the impacts of the risk item in any investment.
The historical volatility of risk is the past performance record that the risk item has been subjected. If in the past the risk portfolio was not prone to a lot of failed cases, then it can be assumed that even the portfolio under review can also be a success (Davis, 2014). The probability of success in a portfolio investment can be calculated and determined from the previous probabilities. This method, however, is not useful to the new portfolio items that have no historical data for the development of a comparative model.
The rate of return on the investment can also be used to determine the quality of the investment. Those investments that have lower rates of return, can have a higher volatility and a possibility of failure. On the same note, those portfolio items that have higher rates of returns indicated on them have a higher rating. They are the investment that may turn out to be most viable in the industries (Davis, 2014).
Risk severity id the degree to which the risk threat occurring may influence the business organization. Portfolio items that have lower severity are ranked highly because even if the risk occurs, the possible mount in damages that may be realized can be negligible (Costantino, Di Gravio, & Nonino, 2015). However, these risks items that have a higher severity of the business organizations can be ranked very highly. They are risks whose occurrences mean that the business will suffer the consequences for a long time.
Risk Likelihood is the possibility of risk item occurring. Risk likely hood can be classified as very likely, moderate of unlikely risks. Those risks that are unlikely are not easily occurring and thus they are a lowly ranked risk (Costantino, Di Gravio, & Nonino, 2015). Those other risks that are very likely are most probably to occur. Such risks are highly ranked since their occurrence is almost certain. There is a need to consider the development of risk factors as values that may lead to key decisions making about risk analysis (Solberg et al., 2015). The following diagram illustrates a risk analysis matrix. It is a useful tool in classifying risk items based on the possible impacts. It is one of the most accurate, models that can be able to influence and develop an understanding of how risk items realizable in a business investment portfolio.
Fig 1: Risk Analysis and Management Matrix
Source (Solberg et al., 2015 p. 1458)
The value that can be realized in the development of business quality portfolio analysis is the use of quality measurements of the risk factors in a business organization may take various forms (Solberg et al., 2015). The level of risk factors can be determined using standard deviation analysis. In this case, a hypothesized mean value is developed based on the character characteristics.
The use of Standard deviation measures; using standard deviation means that there is the development of a hypothesized value (Gaudecker, 2015). Investors must approximate the expected income from the developer investment. How far the actual investment deviates from the hypothesized mean average score determine how volatile the investment portfolio.
Quality of the investment = Hypothesized mean score- actual mean score (Gaudecker, 2015)
The use of Beta; using the beta analysis is understanding the performance of invested stock based on the performance of the other related portfolios in the same industry. It averages the number of systematic risks that an individual investment portfolio may experience as a result of investing in the industry. Notably. Some risks become big or even small depending on the nature of the industry. It means that when the beta is used in the investment portfolio analysis, it is notable that individual security of any fry, investment has relative success propensity derivable from the whole stock market. The beta for a specified time period is normally calculated as; (Kaiser, El Arbi, & Ahlemann, 2015 pp. 126-9)
Ri = covariance of the return of an asset
Rm = variance of the return of the benchmark
Using Value at risk (VaR) is a measure used to assess the maximum potential loss with a degree of the confidence level of risk associated with a portfolio or company. The measurements are carried out using a specified amount of timelines. The use of the value that risk can also be made more useful through the use of Conditional VaR (Varela et al., 2017 p. 3).
Using the Capital Asset Pricing Model; Stock asset investors need to understand the relationship between the systematic risks and the returns on invested assets. Using CAPM is statistical models that help the financial investors to know how well the return on the invested financial stocks would be influenced by financial risks. The owing formula summarizes the application of CAPM (Varela et al., 2017 p.3)
Other Ratios Useful In Portfolio Analysis
There are other rations that can be used to monitor, evaluate and report the viability of the portfolio investments. Some of the ratios are the Sharpe ratio, Sortino ratio, information ratio, and Treynor ratio.
The Sharpe ratio is useful in comparing the possible returns on the investment compared to the risk factors the business faces. It is calculated by subtracting Risk-Free rate from Return of the portfolio and dividing the difference by Standard deviation of the portfolio’s excess return. Sharpe ratio is given using the following formula;
Rp = Return of portfolio
Rf = Risk-Free rate
σp = Standard deviation of the portfolio’s excess return (Sharpe, 1994 p. 53)
Like the Sharpe ratio, the Sortino ratio is used to calculate returns on investment compared to the risk factors the business faces. The Sortino ratio is useful in addressing one of the key weaknesses of the Sharpe ratio, that is the possibility of upward movement of prices that may change the value of standard deviations used to calculate Sharpe ratio. Below is the illustration of the Sortino ratio.
Rp = Return of portfolio
Rr = Required return
TDD = Distribution of returns below the target or required return (Scholz, 2007 p. 179)
But Treynor ratio can also be used to calculate the performance of an investment portfolio. Treynor ratio is useful in calculating if the investment can be compensated by taking a further risk in the market. It is a version of the Sharpe ration illustrated as shown in the following formula.
Rp = Return of portfolio
Rf = Risk-Free rate
βp = Portfolio’s beta (Scholz, 2007 p. 179-80)
Information ratios can be used to illustrate how well the business investment managed to surpass benchmarks. They are useful to determine the extent to which the management may outperform targets. Information ratio is calculated using the following formula.
Rp = Return of the portfolio
Ri = Return of the index or benchmark
Sp-i = Tracking error (Varela et al., 2017 p. 3)
Active Weights and Performance Contribution
Portfolio management benchmarking sometimes calls or the development of active weights and performance contribution (Moneta, 2015). When investors talk about the use of active weights and performance contribution to determine the quality of an investment, all that it means is to show the differences to be realized when allocation of an individual security between portfolio and the benchmark. In their worst, it means that the difference between what a portfolio would allocate compared to what the benchmark would allocate to an investment option so as to identify the level of the deviation between the two.
The psychological reasoning for investing in sustainable investments is to have the best possible returns from the invested funds in the portfolio for the longest time possible. People need to keep reaping from their invested funds in the portfolio through fairs return on investments. This explains why investors invest in this new asset class of portfolio investments. The call for returns based on evaluated structures is useful in defining the value of the invested funds for the benefit of the investors. Gives certainty in the investments.
Sustainable investments are not blind investments. It is the investment of funds in portfolio items that have been well analyzed and evaluated to determine the best possible returns. Therefore, before the investors put in their money, they already know what they are likely to receive as part of their returns on investments. Since the formulas used to analyze the investment options under sustainable investments are empirical, there is a high level of accuracy that assures the investors of their returns. Therefore, it is most likely that sustainable investments perform better than non-sustainable investments. The following chart shows the comparison between the traditional and the ESG investments based on the credit sustainability within the US markets.
Source: CITATION Hil18 l 1033 (Hildebrand, Philipp; Blackrock Management Institute, 2018)According to Grin, Rotmans, and Schot, (2010) sustainable investments give longer prospects even beyond market turmoil. The research report indicates that the analysis of the sustainable investments caters for the possible adverse change in the market economics leading to possible sustainability of profitability in the volatile markets. The research reports were further ascertained by Begg, (2002) who indicate that Sustainable regimes of capital movements in accession are the best possible investments in all the countries and economies. According to global insights report of 2018, sustainable ESG investments perform marginally better than the traditional investments based on the following table. The table shows that the total score for ESG investments based on various scoring scales including the Sharpe ratio is 6.6 compared to the traditional investment scores of 5.2 for the US markets. More analysis is also undertaken for world ex-US markets as well as emerging markets. This is a reason enough to consider the ESG investments better than traditional investments.
Source: CITATION Hil18 l 1033 (Hildebrand, Philipp; Blackrock Management Institute, 2018)The psychological reasoning in differentiating the traditional and the ESG investing leaves the investors indifferent. Many investors ask themselves if the ESG investments are worth the cost, hustle, and efforts when the marginal returns it has over the traditional investments is too small. The analysis shows that the investors are likely to achieve near equal returns in both the analyzed and the traditional investments. However, the ESG investors enjoy a higher certainty that still drives them to take up the route of sustainable investments.
Therefore, it is possible to believe that sustainable investments are way better than the other forms of investments. Through the do not eliminate the risks for the investors, the use of sustainable investments with the analytical values allows the investors to know beforehand the investments they are making in entirety. Therefore, people do not invest and hope against hope but invest knowing the exact returns with certainty since the goal is to have a long-term focus, invested through sustainable models is better than any other form of investments. The investors may not use sustainable investments due to ignorance or the cost involved, but to all those who can afford and know about sustainable investing, there is no other way of investment.
A business that makes sustainable investments its primary focus is able to address three key areas of the investment that will sustain its relevance in the market, and thus perpetual continuity. Some business organizations have achieved the status of sustainable investment goals. Sustainable investing is the kind of investment that puts into consideration three aspects of investing. The key elements that are given close focus on the areas of investment development include the need to focus on the Environmental, social and governance (ESG) aspect of the investment initiative. Environmental aspects are the need to foster the preservations, conservation, and improvement of environmental values, while the social value is the need to achieve success in the realizations of the organizational values that improve cultural and social beliefs in the customers. Finally, the governance sect of the business organizations would focus on the realization of profitability, break even and efficiency in the business process development.
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