How Finance Can Build a Better World

To think about how financial professionals can change the world, think first about how far we’ve come.

I’m fond of reminding readers that it was once a fringe idea to examine accounting information and derive something of value for the investment decision-making process.

We didn’t arrive at modern best practices because a factor model fell out of a tree onto the head of a sleeping investor. The profession of investment management has developed over time through an iterative process where people tried different things, many of which were once considered too far from the mainstream to be taken seriously.

What’s weird today that will seem obvious tomorrow? It’s a great question to ask yourself semi-regularly. There is little to lose from paying attention to the fringes of human knowledge.

There’s a lot there.

You can study existential risk, learn how to teach an algorithm creativity, or maybe just keep it simple and think about the knock-on effects of the investments you make. Capital is a powerful thing. It would be foolish to ignore the role that your decisions play in the broader world.

Especially when there is so much good to be done. For evidence of that, consider the documentary Living on One Dollar, which records the difficulties that a few Westerners faced trying to live as Guatemalan locals do. One of the more telling bits of the program was when the conversation shifted to a common financial objective among rural Guatemalans: stove ownership.

The wrong thing to take away from that is “Oh, all they need are stoves!” The question worth asking is: “What if they could get a loan?”

Don’t discount the potential of credit access.

Extending credit to underserved communities is one of those easy-to-say, hard-to-do things that is full of controversy. Collecting interest payments from impoverished borrowers is a source of concern that raises challenging questions about the trade-offs between short-term profits and long-term prosperity. Additionally, studies have shown that this kind of activity, broadly described as microlending, is not the most effective way to end global poverty.

However, the expansion of credit offered by microlending has had some notable benefits expanding labor options, boosting business size, and helping families manage their budgets. Access to credit has improved the choices available to global consumers earning and spending money, and these options would not have been explored without the work of microfinance pioneers such as Muhammad Yunus, the founder of Grameen Bank.

By considering economic incentives from a different perspective, Yunus was able to develop a business model that functioned at the intersection of capitalism and social responsibility. He will elaborate on these themes in his keynote address, “Redesigning Economics to Redesign the World,” at the 2016 European Investment Conference.

How big an influence Yunus’s model and microlending in general will have on alleviating global poverty remains uncertain, but the insight and innovation that motivated their development represent the sort of thinking that can truly make finance a force for good.

We could use more of it.

This article originally appeared on the European Investment Conference blog.

If you liked this post, don’t forget to subscribe to the Enterprising Investor.

All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©iStockphoto.com/eli_asenova