Portfolio Management Has Little Consideration For Sustainability Issues
Sustainability is often discussed with reference to a single entity. For example, one would either talk about the sustainability performance of a corporation in terms of its water management strategies, supply chain practices and carbon emissions reduction among other things or the sustainability of a building in terms of its rating achievement (i.e. LEED- Gold, Platinum, Bronze). The application of portfolio management is vital be it in the context of selecting which stocks to invest in or in the case of contractors where they need to select which set of projects to bid for. Yet, the link between sustainability and the concept of portfolio management is unclear and has not received much attention.
Portfolio management, in principle, is defined as the process of selecting entities (this could be projects or stocks) which do not violate constraints or exceed resources. Although existing studies have demonstrated the positive influence of portfolio management on business results, in reality, implementing such a framework can be very challenging. Le and Nguyen (2007) outline three reasons for this. Firstly, it may be difficult to compare between entities because of their different characteristics. For a building project, not all listed criteria in the LEED rating system is applicable to all projects. Secondly, uncertainties may exist in the criteria used for assessment. As an example, there might be differences in opinion between practitioners when it comes to subjective criteria such as the level of innovation. Thirdly, interdependency may exist between a set of entities to the others which is difficult to quantify. In the case of stock selection, the price movement between stocks may be correlated due to the fact that they belong in either a similar industry sector or market.
A review of the extant literature reveals that much of the discussion in portfolio management has taken a narrow focus on financial objectives (Meskendahl, 2010), resource constraints (Gutjahr et al., 2008; Gutjahr et al., 2010; Stummer et al., 2009) and refinement of portfolio analysis methods (see Doerner et al., 2006; Carlsson et al., 2007; Hu et al., 2008; Carazo et al., 2010) with little or no consideration for sustainability issues. This is problematic because it goes to show that the emphasis is still very much on a single bottom line (economic) as opposed to a triple bottom line (economic, social and environmental).
To address this gap, through one of my seminal works, ‘Integrating Sustainability into Construction Project Portfolio Management’, I have proposed a framework linking both sustainability and portfolio management in the context of project selection. This framework deals with the afore-mentioned challenges. It acknowledges uncertainty and interdependency in sustainability assessments as well as leverages on the famous efficient frontier to find the optimal point by which sustainability can be achieved without affecting the bottom line. It is hoped that this new line of thought of examining sustainability from a portfolio management perspective would spark more debates and meaningful discussions in this area.
Dr Renard Siew is a researcher based at the Centre for Energy and Environmental Markets (CEEM). His research interest lies in sustainability, integrated reporting, ESG research, socially responsible investment (across different asset classes: equities, infrastructure and property, real estate), climate change, sustainability strategy and green construction for the building/infrastructure sector. Renard did his PhD at UNSW with the support of the Australian Postgraduate Award (APA) Scholarship. He has published in international refereed journals on various sustainability issues in Asia.
