Firms finding it hard to balance ESG with profits, says Eugene Fama

 

Fama, known for his empirical work on portfolio theory, asset pricing, and the efficient-market hypothesis, was speaking to Uday Kotak, managing director and CEO of Kotak Mahindra Bank.

Companies across the world are finding it difficult to balance environmental, social and governance (ESG)-focused investing with profitability, and regulators too aren’t thinking hard about it, said Eugene Fama, the 2013 Nobel Prize winning economist.

“People are willing to pay more for products that are environmentally sustainable. There are ESG goals and profitability goals. I hope ESG products and profitability are compatible. I don’t think regulators are thinking enough about this either,” said professor Eugene Fama at the annual RH Patil memorial dialogue on Tuesday.

Fama, known for his empirical work on portfolio theory, asset pricing, and the efficient-market hypothesis, was speaking to Uday Kotak, managing director and CEO of Kotak Mahindra Bank. Kotak agreed that there is a “fundamental dichotomy between returns and ESG”.

According to Fama, low-cost index funds are inherently better than managed funds, as markets are efficient. “It’s not only better, but it’s also cheaper,” the Nobel Laureate said, adding that a small investor should just go with the market.

Fama, who used computers for his studies back in 1962, when very few had even seen one, does not believe that artificial intelligence (AI)-led trading will eliminate human trading.

“I don’t think the patterns that AI can bring about are just there. Markets are efficient, they adjust …” said the professor, who teaches at the University of Chicago Booth School of Business.

Finance, as a business, will continue. “Markets are always changing, basically finance will keep going,” Fama said.