Investing in the 21st Century: Return, Risk and Impact - Harvard Business School MBA Program

Investing in the 21st Century: Return, Risk and Impact

Course Number 1436

Professor Shawn A. Cole
Senior Lecturer Vikram S. Gandhi
Fall; Q1Q2; 3 credits
28 Sessions

Career Focus

This is an investing/finance course, designed to build on skills introduced in the RC finance course, but with an emphasis on how and whether investors should incorporate what have traditionally been considered “non-financial” criteria in their decisions: for example,  climate risk, environmental sustainability, minority representation on boards, and even the potential to create social good. Covering both public and private markets, the course will present rigorous approaches to business model assessment, valuation, transaction structuring and exits, as well as equity selection and portfolio construction. The course also explores incentives, decision-making, and the crucial problems and opportunities within the industry itself.

This course is geared toward students interested in working in the investment industry - whether directly, as an asset manager/investor, advisor or private individual, or indirectly as an entrepreneur or operator receiving investment capital. We will emphasize practical skills, including pitching stocks, performing diligence, measuring impact, and evaluating portfolio performance.

This course will be differentiated from other excellent offerings at HBS by focusing on the intersection of investing/finance and key global challenges, guided for example by the Sustainable Development Goals, including climate, gender equality, and poverty reduction. Emphasis will be placed on the analytical tools needed to understand the financial perspective and make investing decisions; however, students will also be learn to rigorously assess investments in the context of non-financial objectives. Investing in the 21st Century is a finance course, which could be taken on a stand-alone basis or as a complement to Private Equity Finance, VC/PE, and Entrepreneurial Finance, Investment Management or Investment Strategies.

Course Content and Objectives

An increasing share of assets globally are subject to a non-traditional (environmental, social, and governance [“ESG”] and impact screen), including over 25% of all professionally managed assets worldwide (ca. $23 trillion). This approach is growing - for example, in 2018, Larry Fink, CEO of the world’s largest asset management firm, Black Rock, wrote in a public letter: “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”

This statement reflects an increasingly broad-based sentiment that asset owners should include ESG and impact criteria in their investment process. Most large asset managers (e.g., Goldman Sachs, Bain Capital, TPG, Blackrock, State Street) are establishing sustainability, “ESG” or impact investment practices, and developing products to meet the demands of capital owners, including pension funds, endowments, and family offices.

The promises are seductive: better long-term risk management, “doing well by doing good”, even new sources of alpha. Skeptics argue a focus on non-traditional criteria may distract from and reduce returns, or, on the other extreme, shift funding away from worthy philanthropic causes. Using tools from both the asset pricing and corporate finance toolkits, this course examines these questions in detail: What does it mean in practice to incorporate non-traditional preferences and criteria? How do such activities affect risk and return? Do these new practices actually alter company behavior, or create social value? How is and how should social value be defined and measured?

In public markets, we evaluate the costs and benefits of negative screens, ESG integration, and activist investing. Private market cases cover venture capital in Asia and Africa, private equity in the US renewables market, as well as instruments involving the public sector, such as social impact bonds.

Cases critically examine the logical and market case for a wide range of models, ranging from those that seek (and obtain) above market returns, to those designed to use the power of financial contracting to unlock innovation and help transform the social sector.  Cases will require rigorous financial and investment analysis, building on and extending skills acquired in the RC finance courses.

The landscape is changing quickly; nearly every case was written or updated for this course in the past twenty-four months; most classes will feature protagonists as guests.  The course will be jointly taught by Shawn Cole, Professor in the Finance Unit and Vikram Gandhi, Senior Lecturer and a practitioner in investment banking and impact investing.

Course Organization

The first module provides an overview of the industry, an introduction to key challenges, and the existing evidence base. The second module explores objectives and implementation in the public market context including negative and positive screens, engagement and activism and ESG integration. The third module investigates private market activity with a focus on how firms make investment decisions given both traditional and non-traditional objectives. The fourth module examines the challenges related to defining, measuring and managing “impact” or non-traditional goals and objectives. The fifth module looks at the frontiers of this practice including robo-investing and the evolution of large-scale financial institutions.

Class Sessions: The course has approximately 28 cases, some of which include simulations or group exercises.  Class participation and other activities will account for 60% of the grade.

Final Exam: The Final Exam will account for 40% of the grade.