Sustainable investing takes into account environmental, social and governance (ESG) factors in addition to traditional financial components. Although this form of investing has been around for a long time, ESG has become a hot-button issue due to recent politicization and widespread public misconceptions about what this really means.
ESG investing examines quantitative and qualitative non-financial data about companies. This includes environmental issues such as carbon emissions, pollution and resource use; social issues such as the treatment of employees and community relations; and governance issues such as board diversity, business ethics and transparency.
Criticism of ESG investing has been fueled by post-secondary financing programs that barely address these issues, resulting in significant shortage of qualified sustainable investment professionals.
A basic qualification for financial sector graduates is the ability to analyze the environmental, social or governance factors that create risks and opportunities for a particular company and in turn influence investor returns.
This should not be controversial; it is simply part of good due diligence in portfolio investing, similar to analyzing financial factors.
Read more: What does ESG mean? Two business scientists explain environmental, social and governance standards and principles
Unfortunately, graduates often lack even this basic qualification, in addition to the more advanced expertise needed to assess the impact of investments on people and the planet.
Given the climate crisis and persistent inequality, business schools must urgently and immediately address the sustainability gap in finance education. Formal education should be augmented with experiential learning techniques that introduce students to the complexities and nuances of sustainable investing.
Our research shows this Student Managed Investment Funds (SMIFs) – currently present at many Canadian universities – represent an underutilized, hands-on learning opportunity for training the next generation of sustainable investment professionals.
ESG under fire
Despite the potential of sustainable investing to accelerate the economy transition to a net zero carbon transition and support the UN Sustainable Development Goals (SDGs).has come under fire in recent years.
Politically, sustainable investing has become a household name focal point of partisan conflict in America’s culture wars. Right-wing critics argue that including ESG considerations in investment decisions is and is part of an intrusive moralizing process a ‘woke capitalist’ agenda.
Opponents on the left are downplaying concerns about economic transition costs overstating the power of ESG investing to create a better world.
Recent studies also show this Third-party ESG ratings are unreliableleaving plenty of space greenwashing or at least ‘greenwishing’” – when companies or investors have good intentions, but fail to achieve their sustainability goals.
Criticism and politicization, combined with other factors, have done just that flows to ESG funds are curtailed. This is unfortunate given the urgent need to mobilize more financial capital to tackle climate change, biodiversity loss and inequality.
Business school reform
Developing competency in sustainable investing requires a serious overhaul of business school funding programs.
Core courses should include sustainable investment concepts and tools as part of regular financial education. This is especially important given rapidly evolving ESG and climate-related regulations and increasing global risks that pose new threats to companies and investors.
It is also important that students learn the limits of different forms of sustainable investing, to avoid falling into the trap of greenwashing.
Many ESG strategies are primarily focused on risk mitigation with, at best, a marginal impact on people or the planet. Others, like impact investingfocus on measurable social and environmental outcomes, often using the UN SDGs for their impact targets, in addition to financial returns.
Impact investing could unlock much-needed capital for crucial sectors in the net-zero transition that would otherwise be underfunded using traditional financial metrics.
In short, sustainable investing, in all its forms, requires additional skills that are currently lacking in financial education. Social and environmental impacts can be difficult to quantify and may require longer-term perspectives and qualitative judgments about the potential impacts on many stakeholders.
Student-managed mutual funds
These skills are best developed through hands-on exercises that supplement formal instruction. Student Managed Investment Funds (SMIFs) providing students with experience working collaboratively to manage real-world investment portfolios under the guidance of faculty supervisors and industry professionals.
Canadian universities have established more than 30 funds that students oversee as portfolio managers, buying and selling stocks, bonds or other assets. The capital in these funds comes from a variety of sources, including corporate donations, philanthropic gifts from individuals or foundations, and in some cases from university endowments.
Unfortunately, our research shows that only a a small minority of these funds take ESG considerations into account in their mandates.
Of the 31 Canadian SMIFs we analyzed (a total of $79.5 million managed by students), only five (16 percent) include some level of ESG consideration. Considering business schools have long used student-managed funds to train the next generation of investment bankers, financial analysts and other financial industry professionals, this is surprising – and disappointing.
The gap is even wider for impact investing, which is not mentioned in any of the funds in our sample, despite universities’ commitments to the UN Sustainable Development Goals.
Sustainable finance education could benefit greatly from students working together to integrate financial, environmental, and social factors into student-managed investment funds.
Learning by doing helps students develop important analytical skills, familiarizes them with important tools and data sources, and helps them navigate maze of ESG standards, frameworks and guidelines.
The role of universities
Including sustainability mandates in financial programs and student-managed investment funds will ensure that Canadian universities train the next generation of sustainable investment professionals needed to accelerate the net-zero transition.
We encourage college administrators and finance educators across the country to immediately implement ESG policies for existing student-managed mutual funds. New funds could also be established in collaboration with industry and donors to focus on certain themes, such as climate solutions or climate solutions nature-positive investing.
An encouraging initiative in this regard has been completed Drive impacta non-profit organization that partners with seven universities to manage their own local student impact funds.
Through creative partnerships with investors, Propel has supported student education while benefiting local communities, with students donating $750,000 to 14 Canadian social enterprises over the past three years. We offer this program to students at the University of Victoria and hope to expand it to more Canadian universities.
As we face pressing social and environmental challenges, we cannot be discouraged by partisan snipers. Instead, we must build momentum for sustainable investing by training future financial professionals more effectively.