Responsible Investing: Internalizing the Externality

October 28, 2019

Our philosophy on responsible investing traces back to Who Cares Wins, a seminal report published in 2004 by then secretary-general of the UN, Kofi Annan. We share his belief that effective management of ESG issues increases shareholder value. We also believe regulators, grassroots activists, and other shareholders are going to find better ways to expose externalities as the market failures they are.

Historically, externalities have persisted because of the lack of information or market mechanisms to recognize them. As this information becomes more available, private markets are well positioned to benefit. Arbitraging inefficiencies is what we do.

As long-term investors, we need to recognize climate change, pollution, income inequality, and corruption as the externalities they are: a skew requiring future generations to subsidize the present through lower quality of life, higher taxation, and increased socio-political instability. As these externalities become more transparent, they will become easier to internalize—creating a link between ESG factors and financial returns.

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