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Modernizing modern portfolio theory

The following blog by HMI Senior Fellow Jon Lukomnik and Jim Hawley, the Head of Applied Research at Truvalue Labs, is a modified version of an article requested by the Principles for Responsible Investment. It is a “preview” of the book the two are researching and writing for Routledge. The anticipated publication date is late 2020 or early 2021. Modern portfolio theory (MPT) – the dominant investment paradigm across the world – is in major need of a refresh. Simply put, MPT is not up to the challenges that confront today’s investors. Although this widely-accepted Nobel Prize-winning financial theory enriched…

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The Role of Trade Associations in ESG

  While ESG integration has been widely explored from company, investor, and broader capital market perspectives, there has been less focus on the role of trade associations in ESG integration and their influence on regulation and policy development on ESG issues such as climate change. This research note, prepared by KKS Advisors, shines a light on the role that trade associations play in promoting and inhibiting the integration of ESG in business practices and reporting. It examines the ways that companies currently disclose their trade association memberships and identifies barriers to increased disclosure and transparency. Specifically it makes a case for…

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Sustainability in Capital Markets: A Survey of Current Progress and Practices

In the three years since our 2015 survey on the state of ESG integration in Capital Markets, interest and engagement with ESG in capital markets can truly be said to have gone mainstream. ESG investment products flood the market in almost every investment category, from ETFs to fixed income and alternatives. ESG assets under management now total $30 trillion, up from $23 trillion in 2016 and are projected to grow to $35 trillion by 2020. The first version of this report was published in January 2016, using 2015 data. The report offered a landscape analysis of the mainstream capital market…

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Introducing the newest HMI Fellow, Jon Lukomnik

The High Meadows Institute is pleased to welcome Jon Lukomnik as a senior fellow of the Institute. Jon has had a long and distinguished career in the investment management industry and is one of the pioneers of modern corporate governance. He has written and published over 200 academic and practitioner articles on how to strengthen the contribution and accountability of the financial systems and asset management industry. He is the past executive director of the Investor Responsibility Research Center (IRRC) Institute, whose research has been widely praised for objectively examining fundamental corporate governance and capital market issues. He is a…

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The End of Sovereignty: The Challenge to Investors

This year, there have been many important developments in the discussion on the role of investors in corporate responsibility and leadership in a global society. In the spring PGIM, the global investment management businesses of Prudential Financial, Inc. (PFI) and one of the top 10 largest global investment firms, issued a provocative paper titled The End of Sovereignty, on globalization, nationalism and the implications for institutional investors. The paper explores how the sovereignty of nation-states is now challenged by the forces of globalization and technology beyond their direct control. It notes that 70 of the top 100 global “economies” are…

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Is It Time to Rethink Corporate Governance?

  For the last fifty years, the mandate and role for corporate governance have been set within well-defined boundaries, in which the business of business was business and the well-being of society was the responsibility of governments. This paradigm was summed up succinctly in 1970 by economist Milton Friedman who noted, “There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.” Today, thanks to globalization and the international economy, we live in a world in…

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Recommended Reading

What the Wells Fargo Crackdown Signals to Corporate America The Federal Reserve’s recently imposed penalties on Wells Fargo diverge from President Trump’s stated position on de-regulation. However, Peter Henning of the New York Times sees the “crackdown” as a one-off penalty and not a sign of broader industry regulation to come.   Unilever Threatens to Reduce Ad Spending on Tech Platforms That Don’t Combat Divisive Content Unilever, long viewed as a leader in corporate social responsibility, recently announced that the company will no longer advertise on platforms that are not “committed to creating a positive impact in society.” The company…

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BlackRock’s Larry Fink Redefines the Rules of the Game for Business

For the last 47 years, since September 1970, financial markets have been guided by the maxim articulated by Milton Friedman on the “rules of the game” for business. “There is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” On January 18th this maxim was overturned by the CEO of BlackRock, the world’s largest institutional investor. In his letter to CEOs, Larry Fink said, “Society…

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Recommended Reading

BlackRock Message: Contribute to Society or Risk Losing Our Support Larry Fink, the CEO of BlackRock (the largest investor in the world), is sending a letter to the world’s largest public companies letting them know that in addition to turning a profit, they have to show that they are doing good in the world to receive BlackRock’s support–and a share of its $6 trillion AUM. In the letter, Fink shares HMI’s perspective that government is not doing enough to prepare for future and the onus now rests on the private sector to address societal challenges. Wall Street Fighters, Do-Gooders—And Sting—Converge…

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ESG Integration in Investment Management: Myths and Realities

Until very recently, there has been considerable doubt, especially among mainstream investors, that companies with high ESG “scores” could succeed in producing competitive returns for their shareholders. Studies of the last three decades of the 20th century have reported that what was then known as Socially Responsible Investing (or SRI)—an investment approach that worked mainly by screening out the companies with the lowest ESG scores or entire industries such as tobacco and alcohol—produced shareholder returns that were often below market averages. And this finding has in turn contributed to the widespread perception that corporate efforts to address environmental and social…

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