2 Investment externalities
Beslik
Mainstream investing, for 100 years, ignored and still ignores negative externalities generated via their investment decisions. And gets paid for it.
Companies that manage relevant and material environmental, social, and governance aspects of their business operation, as well as how they manage what they produce, provide, and sell, will have a significant impact on their long-term valuation.
As such, it will also impact their long-term financial performance, given that valuation is mirrored in that performance over time. All of this is naturally connected to the pricing of material and relevant positive and negative externalities, which, at least in Europe (EU Taxonomy), has helped create an initial price and cost framework that can be used, at least to some extent, to understand implications on companies and sectors subject to these investments.
The major investment styles can be broken down into three dimensions: active vs. passive management, growth vs. value investing, and small cap vs. large cap companies. ESG and Impact investing are investment philosophies rather than an additional approach to mainstream investing as such.
Mainstream investing across the world does not care, or has no intent to do so, or is not mandated by fiduciary requirements, to address any negative externalities generated through the investments they make.
Mainstream investing operates in a form of ‘market failure’ and does what it can to maintain that failure. In fact, it is incentivized to do so.
What determines the difference between mainstream investment philosophy and ESG & Impact investment philosophy is the definition of ‘return’ or outcome on your investments. Return and outcome are certainly interpreted in a different way depending on the investment philosophy deployed.