About Us
Our Mission
The Externality Investment Research Network‘s (EIRN) goals are to encourage, initiate, incubate, collect, coordinate, and disseminate research by academics, practitioners, and others on the financial impact of the economic externalities generated by portfolio companies on asset owners’ and asset managers’ portfolios. This includes research and thinking that has sometimes been called the “whole portfolio effect” or the “universal owner effect”. To date, research in this area has been primarily qualitative and case based and/or focused on economic analysis. The initial goal of EIRN is to stimulate complementary quantitative studies and develop models, analytics and methods. The second goal of the project is to analyze various implications of this research, e.g. for fiduciary duty, system-level investing, impact on investors and beneficiaries, on civil society sectors.
Activities and Network Building
EIRN will facilitate research publication, roundtables, conferences, and other gatherings, as well as link to existing academic and professional journals, and to non-academic networks and organizations. It will do this through creating a network of researchers, academics, practitioners committed to developing a better understanding of the dynamics and consequences of the internalization of externalities in diversified portfolios.
The Current State of Research
To date the universal owner or whole portfolio effect is widely recognized among many large institutional investors and academics as a coherent finance theory - a ‘perspective’ or ‘philosophy’. But quantitative analysis has lagged, slowing adoption of what has come to be called system-level investing. There are essentially no studies (academic or practitioner) which quantify the externality effects of individual companies, sectors or investors on portfolios themselves. This means that the valuation implications and risk profiles are underestimated for negative externalities, while positive externalities are barely considered. EIRN-stimulated research among academics and others seeks to remedy flawed risk and valuation analyses, as financial academic work in other areas has traditionally significantly impacted adoption in financial markets.
Focus on Financial Impact
The focus on ‘financial’ impact is intended to be broad. This includes effects on investors and beneficiaries, directly and indirectly. Almost by definition a universal owner type portfolio needs to be cognizant of system risk factors, as it internalizes externalities, some of which are systemic risk factors. In the language of finance, portfolio systematic risk incorporates systemic risk, and whatever much financial practice and theory has typically suggested, portfolio externalities may themselves contribute to systemic risk. Thus, the relation is two way.
Research Scope and Approach
EIRN’s research scope may broadly quantify, value, and assess how externalities impact whole portfolio risk-adjusted financial return and ways in which externalities are linked to effects on the ‘real’ non-financial economy. This approach, which considers the systematic, non-diversifiable financial impact of such externalities, differs from a more traditional financial narrower approach which focuses overwhelmingly on market-relative returns (based on modern portfolio theory assumptions and practices). EIRN’s approach is deeply and broadly financial, reflecting our view that to best influence financial practice and financial models, one must speak the deeply quantitative language of finance. Additionally, as part of the research scope, an additional focus may be on how externalities impact risk adjusted returns of selected corporates directly (e.g. insurance companies; utilities).
Interdisciplinary and International Outlook
ERIN’s approach is interdisciplinary and international because we believe robust and effective research depends on these features. Siloed thinking has impeded insights and creative problem solving. Externalities are complex and require many different skills to illuminate and analyze their dynamics and impacts.