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Governance Research Digest – January 2012

Summary

Portfolio 21 Investments, a Portland-based investment management firm, has published a report highlighting significant factors and trends impacting investors in the 21st Century. The publication offers a new framework for managing ecological risks and emerging opportunities, and meeting the multi-faceted needs of today’s investors.

Key Findings

• The paper proposes three new investment decision-making principles related to risk, growth, and utility: Integrated Risk, Selective Growth, and Multidimensional Utility Functions.
• The three principles are founded on observed facts and market behavior in contrast to simplified assumptions and generalizations.
• These New Foundational Principles should form the basis for investment decision-making in place of a theory that can only be substantiated by making unwarranted and unrealistic assumptions about risk, growth and utility.
• Integrated Risk includes the externalities that are not priced in the market but which threaten to inhibit or shift returns.
• Integrated Risk considers the potential impact of ecological limits as they manifest in business disruptions, shortages, and social/political upheaval.
• The end of growth does not mean the end of the economy, but, because the economy must curtail throughput, there will be clear winners and losers.
• Rather than a “rising tide lifting all boats”, the new economy will resemble a zero sum game with respect to throughput-driven growth.
• The term Selective Growth refers to the fact that growth can occur even if average economic growth is zero or negative, but it will be unique to particular sectors and companies rather than a function of rising per capita material consumption.
• The existence of Multidimensional Utility Functions means that clarity with respect to the unique purpose and goals of each asset owner should be central to the investment process.
• But, unless this is specifically called out, there is a tendency for investors, advisors, and consultants to default to the language and practices of Modern Portfolio Theory, despite the shortcomings identified here and elsewhere.

Author(s)

Portfolio 21 Investments

Source

PDF report

Tags: ecological risks, investors, Portfolio 21 Investments, portfolio management