Goal Directed Portfolio Management: The Case for Sustainability

Abstract

Sustainable investments help in the optimal use of natural resources for increasing the welfare of the current generation while not reducing benefits to the future generations, and preserving the global environment. Innovations in production technology in producing clean energy, and optimal use of recycling of the hazardous waste into usable energy are among approaches conducive to sustainable environment. Regulations that would limit the increase in hazardous waste appear to have helped in limiting pollution and optimal use of resources. Meanwhile, recent innovations in the capital markets are purported for mitigating global pollution. This is made possible by the trading of financial assets that allow risk sharing among industrial firms. In the presence of a ceiling or an upper limit for causing environmental hazards, firms with a more environmentally safe technology can sell their “rights to pollute” to the other firms. In this manner, the overall damage to the environment is at least within a given limit. It is speculated that the capital market by properly pricing the risk would help the more efficient firms to manage their cost and perhaps motivate other firms to follow suit. Nevertheless, the environmental threat is a case of a novel event for which historical information is unavailable. Especially relevant, the risk involved in environmental damages is governed by entropic laws of nature. Specifically, production in the real sector of the economy is a case of an increase in entropy as the use of raw materials is a case of turning the ordered state of nature into disorder. Similarly, such production processes are irreversible. That is, at best, one can limit the rise in global environmental risk.