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This chapter fo-cuses on building a portfolio extending beyond purely financial returns. The main differences between building a portfolio for traditional and sustainable investors concern their goals and how to achieve them. Traditional investors want to realize an expected level of return while minimizing risk. Their goal is financial. By contrast, sustainable investors seek both financial and non-financial returns. Sustainable investors look at ESG factors, along with financial analy-sis. Because their goals differ, how they achieve them also varies. Although the same asset clas-ses are generally available to both investor types, not all investments within each category are necessarily sustainable. Therefore, those interested in sustainable investing have fewer choices within each asset class than traditional investors. Sustainable investments may represent a core part of a portfolio or a satellite component, depending on the investor. This chapter highlights several portfolio topics, including asset allocation, diversification, and rebalancing.

Personal values are the basis of sustainable investing. Such values can differ in focus and conviction. Many people derive their values from their strong beliefs stemming from religion, political association, and patriotism. They can target topics like social values, civil rights, and climate change. Various re-ligions, including Catholicism, Judaism, Islam, and Mormonism, have different values and thus offer diverse investment guidance. Similarly, different political ideologies lead to other invest-ment objectives. This chapter helps sustainable investors reflect on their own beliefs, under-stand the conflicts between value-based systems, and align their investment strategy with their beliefs. Many stock indices, mutual funds, and ETFs follow various values-based strategies to help investors satisfy their sustainability criteria.

This chapter pro-vides a modern view of a company’s responsibilities and obligations. Many companies have vast amounts of wealth and the power to make positive societal changes. Many businesses actively advocate against social injustice, pollution, and climate change. A company can support these activities by changing its supply chains, manufacturing processes, and hiring practices. Firms can also be socially responsible by making charitable donations, engaging in community projects, and enabling employees to donate and volunteer. Corporate social respon-sibility (CSR) starts with business ethics and how a company views its various stakeholders, like stockholders, employees, customers, the community, and the environment. This chapter de-scribes firms’ socially responsible activities and helps sustainable investors assess inevi-table trade-offs and inconsistencies that arise. For example, a firm may appear socially responsi-ble but not environmentally responsible.

Deciding how to invest money can be complicated. For traditional investors, the primary criterion is profitability. However, the process becomes more challenging for sustainable investors because they add an-other layer of complexity by integrating personal values and societal issues into investment deci-sion-making. In addition, these investors have many methods available to help them meet their goals. These approaches include screening, ESG integration, socially responsible investing, shareholder engagement and activism, thematic investing, and impact investing. As a result, no “one size fits all” approach is available for sustainable investing. Many vehi-cles are also available to help sustainable investors align values with investments, such as stocks, bonds, mutual funds, and ETFs. In summary, this chapter helps sustainable investors sort through various investment approaches and choices that provide more than just a financial re-turn.

This chapter in-vestigates the financial and social performance of sustainable investing and discusses specific da-ta concerns for measuring performance. The bulk of the chapter examines the financial perfor-mance of sustainable investing compared to traditional investing for different strategies and as-set classes, including equity funds, index funds, fixed-income funds, and even funds focused on “sin” stocks. Overall, the evidence suggests that sustainable investing does not underperform traditional investing and may slightly outperform under certain circumstances. The chapter also explores the social performance of sustainable investing and whether it affects our society and planet. Most sustainable investors want a competitive financial return and an impactful social return. The chapter aims to provide an easy-to-digest menu of performance topics and let investors decide if they can have their cake and eat it too.

Sustainable in-vesting has changed considerably over time. Historically, many viewed it as a form of religious in-vesting that focused mainly on prohibiting “sinful” practices such as usury and excluding “sinful” investments through negative screening. Sustainable investing grew to incorporate a broader range of socially responsible values and practices, in-cluding “socially responsible” investments through positive screening. Sus-tainable investing has now evolved to include a wide array of different approaches that incorpo-rate various investment products and strategies. The most common method is integrating envi-ronmental, social, and governance (ESG) criteria into traditional investment models. Niche ap-proaches like green, impact, and community investing fall under sustainable investing. This chapter explores the evolution of sustainable investing and how it has become one of the most dominant trends in the current investment landscape.

Institutional investors appear to have selective preferences regarding corporate social responsibility. They appear indifferent to the presence of positive environmental (E) and social (S) indicators, but underweight stocks with negative ES indicators. This asymmetric pattern is particularly strong for longer-horizon institutions. Our empirical analyses indicate that this pattern is likely driven by economic incentives as the presence of negative ES indicators reflect downside risks: higher stock return skewness and probability of eventual bankruptcy and/or delisting. Positive ES indicators seem irrelevant in this context. Time-varying economic incentives also drive the dynamic pattern of institutional ownership of stocks with static negative indicators due to their controversial products (e.g., tobacco and firearms).

We examine the caste affiliation of corporate leadership in India. We find that the affirmative action policies targeted to the public sector have not filtered into the private sector. Indian boards are not very diverse—usually dominated by directors from a single caste. Boards dominated by one caste also tend to have a CEO from the same caste, putting into question how independent some directors may be. Over one third of the directors are interlocked by holding multiple directorships. However, this interlocking is done with firms dominated by the same caste. Therefore, Indian corporate leadership fails to obtain the benefits of having directors with weak social ties. The lack of caste diversity in boards, CEOs, and interlocks are all associated with lower firm value.

In this paper, we examine the relationship between sleep and financial risk taking. The results indicate that individuals who have better sleep display less distortion of probability, are less susceptible to the present bias, and have a lower discounting rate. Specifically, individuals with better self-reported sleep quality have less distortion of probability, a more curved utility function, and are less loss averse, while those with fewer sleep disturbances display less probability distortion and have more curvature in their utility function. Overall, the results show that there are cognitive deficits in financial decision making by having poor sleep habits that can have important consequences.

Social media has reshaped business models, economies, politics, and culture around the world. In this paper, we identified social media stocks from various sectors by using a strict, academic definition and then studied their performance and return characteristics. Multivariate regression results demonstrate that being recognized as a social media firm yields extra return. The performance of social media stocks is not associated with macro-level sentiment, but rather with firm-level attention paid by potential investors. Causality tests indicate that the default risk premium and volatility have incremental power in explaining the performance of social media stocks.

Morningstar’s disclosure of fund level carbon risk (CR) scores reveals that pre-disclosure (environmentally) sustainable funds in the US had lower portfolio CR scores than convention funds and showed a further significant relative reduction post-disclosure, consistent with a causal impact of disclosures. Contrary to perception, conventional funds that are signatories to UN’s Principles for Responsible Investment (PRI) or those with secondary sustainability mandates appear to be pretentious―behaving more like other conventional funds rather than sustainable funds. Indeed, fund managers are sensitive to disclosures only in the presence of binding commitments to environment sustainability. Sustainable funds lower their CR score by reducing exposure to fossil fuels, not by increasing exposure to renewables.