By Thomas Kostigen
Last week, scientists discovered what they believe is a portal to the fifth dimension. In physics, three dimensions, or parameters, are how we view space. A fourth dimension includes time. A fifth dimension is something else entirely: it’s a hidden universe; something beyond space-time as we know it.
Finance and investing are often viewed one dimensionally—by earnings/profit. But that too is changing. More dimensions are being taken into account when it comes to economics. And these are being driven by sustainability. Indeed, researchers are calling this kind of accountability and holistic view as “three-dimensional sustainability.” It’s important because it may change not only how the financial markets are deemed efficient, it may change the ways in which entire economies are viewed, how risks are assessed, and where investment dollars are allocated to drive growth and prosperity.
In a highly academic research paper that was recently published, a half dozen scientists from different universities in Europe wrote: “In a nutshell, the paradigm of conventional finance turns out to be inadequate and incoherent with the changes taking place in the economy, in particular related to the growing threat of social and environmental risk. Sustainable development is a very specific economic category, which requires an effective funding mechanism that should take into account a three-dimensional (economic, social, environmental) sustainability perspective.” In other words, by solely focusing on profits, economies are failing to account for, and therefore failing to invest in, sectors that can better drive growth. For investors, identifying these growth areas could, on the other hand, reduce risk.
Spotlights should be particularly shone on the banking sectors, insurance, coal mining, and renewable energy. These sectors are most at risk in developing countries of negative factors affecting them. These markets, researchers say, largely take a one-dimensional approach to financial markets. In the developed world, of course, there is still much room for improvement to make markets efficient, but they are on a better track of including sustainability measurements. This could draw the conclusion that an investor may be better avoiding risky sectors such as energy, banking, and insurance in the developing world while embracing those same sectors in developed world markets. Why? Sustainability is increasingly being included in risk assessments in those markets, and growth is more likely. Higher alpha with lowering beta in finance speak.
To be sure, a good financial advisor can help take a look at your portfolio from a three-dimensional sustainability point of view. Or you can take a different look at your own portfolio for how it stands up beyond profits.
Economic, social, and environmental development are beginning to become the conventional parameters by which investments are flowing. Sustainability, obviously, has become the go-to buzzword for an emerging sector that includes alternative energy, diversity, good governance, fair labor, and more.
To judge a company and in turn a portfolio on these parameters makes good sense and increasingly good financial sense. Grading a portfolio or an investment’s success by profit alone seems near-sighted. Take a longer, more three-three-dimensional view.
Thomas Kostigen is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.