Professor Markku Kaustia (Aalto University): "Can investors still save the world? How it's not happening, and how it could happen".
We need the best ideas, and we need good capital. In a talk that assumes no prior knowledge in finance, yet probably delivers new insight even for experts, Professor Kaustia unpacks the meaning of the opening sentence, from the viewpoint of sustainable finance and investor behavior.
In the Naïve version of corporate goodness, investors who contribute to saving the world earn extra returns on their money while doing so. The outcomes have been disappointing, however, both in terms of world saving impact, and in terms of earning those extra returns. Such outcomes nevertheless make sense in a classic finance theory framework on efficient capital markets and the position of equity holders as residual claimants (these concepts will be explained).
But that’s finance theory from the 1970s, how relevant is it today? Specifically, does finance theory even “allow” for the possibility of investors saving the world? Professor Kaustia argues that it does. He outlines the conditions that are required for that to happen.
To start, investors should expect lower, not higher, returns from these activities, and understand why and how this is actually a good thing! That’s a necessary condition, not a sufficient one.
There’s more. Investors should radically reconsider the strategies and approaches they are ready to employ in this regard, understand the distinction between correlation and causation when investing for impact, and engage in new type of collective action. This lays out the narrow path ahead into a better world, in our lifetime.
More about the speaker
Markku Kaustia, Ph.D., is the Hannes Gebhard Professor of Finance and Insurance at Aalto University. His previous faculty positions were at the Wharton School (University of Pennsylvania) and the Ross School of Business (University of Michigan), and he has also taught at Columbia University in New York City. At Aalto he has served as the Head of the Department of Finance, and the Head of Finance B.Sc. and M.Sc. programs. He is an expert in financial markets and investor behavior, having published in the top scholarly journals such as Journal of Finance, Journal of Financial Economics, Management Science, Journal of Finance and Quantitative Analysis, Journal of Banking and Finance, etc. Professor Kaustia is involved in regulatory consumer financial protection, and is a frequent speaker in practitioner seminars. He’s a recipient of the Aalto Business School best teacher award.
