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. 

The panelists critiqued the general trend toward short-term investing; for example, in the 1980s the length of an average stock investment was five years, whereas today it is only five months.  In another example, a panelist recounted attending a recent conference where Chief Financial Officers from various corporations were queried about their investment horizons.  The majority said their horizon is less than 1 year, some less than 1 quarter.  As investors have become more focused on the short term, the challenge is to develop a system that rewards longer-term thinking while incorporating broader environmental and social issues into investment decision making.

Areas for improvement suggested by the panelists include clarifying the legal framework for fiduciary responsibility. Most often, fiduciary responsibility focuses strictly on financial attributes without consideration of environmental or social concerns.  We believe fiduciary responsibility should incorporate environmental and social issues in order to comprehensively evaluate both risk and opportunity within sectors and companies.  Traditional investment analysis underestimates the long-term opportunities and risks associated with ecological limits.  As long term investors, we conduct fundamental research that combines traditional investment information with environmental research.  This process identifies companies that are innovative, competitive, and that are creatively responding to ecological limits.

Emily is a Senior Research Analyst with Portfolio 21 Investments. She has 9 years of experience in the environmental field.