This is how finance sees the world:

This is how my 3-year old daughter would see the same equation:

1 + 1 = 2

In the wake of the recent JP Morgan debacle it is even clearer that, in too many ways, finance has gotten unnecessarily complicated. From unexplainable derivatives to densely packed academic papers, we continue to try to hedge the un-hedgeable and explain the unexplainable.

Perversely, the complications have served the industry well over time. Many investors seem convinced (so far) that investing is a process so intricate that it is best left to those who trumpet their services most opaquely. And loudly.

That is not to say investing does not take skill. But it is too often forgotten that investing is sometimes as much art as science. And that risk, no matter how dressed up, is still risk. Modeling is fine, as long as it leaves room for human nature.

There is plenty of room to add value as financial professionals. Being a good steward of people’s hard earned money is a valuable service. But a confusing maze of unnecessary middlemen, combined with manufactured complexity of financial instruments, destroys rather than adds value.

During the CFA Conference, the President and CEO of the CFA Institute, John Rogers, issued a call to action urging all members to take the necessary steps to restore trust in the financial services industry. It was a timely message. Focusing on transparency and actual client needs are effective remedies for an ailing industry. And, best of all, they are not complex in the least.

Jim is Portfolio 21's Chief Investment Officer.  He has more than 20 years of experience in socially and environmentally responsible investing. 

What about risk?  Certainly some of the risks associated with the market bottom have been addressed.  We don’t have to worry about a big bank going bust tomorrow as we did back in the dark days of 2008 and 2009 (whether or not a few of them should have  is another story).  But is there really less risk in the market these days?

Central Banks worldwide have tripled the size of their balance sheets.  In addition to this being an event without historical precedent, there is the none-too-small matter of increased interest payments when rates eventually rise.

Greece did not default, but it is certainly not out of the woods, while Portugal, Italy, and Spain also find themselves in a heavily wooded area.  The European banks are still highly leveraged and loaded with debt from Portugal, Italy, Ireland, Greece, and Spain.

Corporate profit margins are at a record high with nowhere to go but…higher to new records?

The housing market is still searching for a bottom and unemployment, though improved, is still a drag.

Throw in an Iranian nuclear threat and you start to wonder if risk hasn’t increased since 2009.

So, why have stocks gone straight up off the bottom?  Some say the stock market is forward-looking and has discounted all of the above risks already.   Some say that stocks have been and will continue to be bought because they are cheap relative to bonds (disregarding that bond prices have been and are being held artificially low).

Or, maybe, Central Bank liquidity has provided a backstop for investors, which has encouraged them to invest in the riskiest and relatively (to bonds and cash) cheapest asset available in a search for return of any kind. Expect to see some volatility once the money printing stops and the market is allowed to re-price assets.

Jim is Portfolio 21's Chief Investment Officer.  He has more than 20 years of experience in socially and environmentally responsible investing. 

GABV member banks favor a triple bottom line approach and are committed to serving their respective clients and communities.  The group emphasizes long-term partnerships, as well as transparency and good governance.  In contrast with the “too big to fail” banks, GABV banks are focused on core banking activities, gathering deposits, and making good loans.  At Portfolio 21 Investments we agree that the GABV model is an important foundation for a successful bank in a future with increasing environmental and social constraints.  Furthermore, it is becoming apparent that GABV member banks often have better growth prospects, and tend to be better capitalized and generate higher returns on assets.

However, raising capital to foster bank development and growth is still a major hurdle for most GABV members.  Most equity investors overemphasize earnings and asset growth at the expense of externalities.   These externalities present risks that are often ignored by “traditional” banks.  GABV constituents have attempted to address many of these external environmental, social, and governance risks with a new banking model.  We expect to see other banks around the world increasingly adopt a similar philosophy as previously ignored risks emerge and become more widely known.  Investor confidence and increased funding opportunities should potentially follow suit.

For more information on the Global Alliance for Banking on Values visit www.gabv.org.

And congratulations to New Resource Bank for its recent Best for the World Award from B Corporation!

Tony is Senior Portfolio Manager with Portfolio 21 Investments.  He has 15 years of experience in the field of investment management.

The information presented above nor any opinion expressed shall be construed as an offer to sell or a solicitation to buy the security.