Effectual makes a reality of portfolios that create long-term, sustainable value. The basis is its comprehensive, objective and verifiable framework.
Externalities are the key to the full efficiency of the economy, so that all resources including human, natural and social capital are used in an optimal way. Investment strategies built on externalities select firms that create long-term value, because externalities are internalized over time.
Financials +
Externitals =
Sustainable
Return
Traditional investment metricscapture only part of relevant factors.
External costs & benefits to society and the environment reflect firms’ full.
Integrating externalities into the return metric leads to sustainable capital.
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An externality or external effect is an uncompensated cost or benefit to an uninvolved third party that arises due to other economic agents’ activities.
A prominent example for a negative externality is air pollution, and more generally, environmental damages. An example for a positive externality is the creation of knowledge.
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Externalities are estimated as the damages or benefits, in monetary terms, to society and environment. They are calculated by measuring a physical impact driver, such as greenhouse gas emissions, and multiplying by a monetary valuation factor.
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Sustainable return is the key metric of sustainable investing. It corrects traditional, financial return by the externalities associated with the investment.
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The theory of externalities is a foundation of public economics and environmental economics. Since decades, governments and NGOs use externalities to assess the environmental and societal impacts of proposed legislation, regulations and public projects.
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Taking into account externalities is the essence of long-term and sustainable investing. Significant externalities are likely to attract government attention, e.g. taxation, or product market reaction, e.g. consumer activism, with associated effects on future cash flows and security prices.
