The Principles for Responsible Investment (PRI) and United Nations Global Compact released the first version of Coping, Shifting, Changing in 2014. The central premise of the report was that companies could be long-term even in a short-term world, offering practical recommendations on how to achieve this.
This new report, released on September 18, responds to feedback that investors could, and should, do more to support companies on those recommendations. It builds on important work done by other organisations also working to tackle this problem. It presents three main strategies, each including recommendations focused on measures that companies can adopt to address the problems caused by market short-termism, and actions that investors can take to support companies in those efforts.
Below we excerpt the report’s executive summary. You can download the full report here.
Companies that operate with a long-term outlook have consistently outperformed their industry peers since 2001 across almost every financial measure including revenue, earnings and job creation. Similarly, strong corporate performance on environmental, social and governance (ESG) factors correlates positively with improved cost of capital and financial performance. However, research shows that companies will forego efforts to create long-term value because of pressure to meet short-term objectives.
Short-term pressure is an obstacle to creating a global financial system that supports long-term value creation and benefits the environment and society. In 2015, 193 world leaders agreed upon 17 Sustainable Development Goals (SDGs), covering issues ranging from climate change to gender equality. The SDGs provide an opportunity for business leaders, investors and companies alike to re-think their approach to value creation, serving as a blueprint for action in both capital and investment markets. However, excessive short-term pressure will hamper progress unless action is taken by both companies and investors.
The perceived investor emphasis on short-term financial performance creates pressure on companies to focus on short-term financial performance and pay less attention to fundamentals. It can result in forgoing opportunities with a positive long-term net present value, including those that provide wider sustainability-related benefits. It can also affect how ESG factors are considered in strategy, capital expenditures and daily operations. Consequently, companies may miss opportunities to: drive sustainability-related innovation; develop their human capital; expand to new markets; grow their customer base; create operational efficiencies; and effectively manage social and environmental business risks.
Investors themselves are also under considerable short-term performance pressures, with the benchmarking and evaluation of investment managers often based on one- and three-month timeframes. Even those organisations with long-term investment time horizons often focus on quarterly or even monthly portfolio performance. Regulatory developments further influence short-term behaviours. Following the global financial crisis, for example, regulatory bodies began to place greater emphasis on short-term performance management and reporting, particularly in situations where pension funds have shortfalls against their liabilities.
While it is important to recognise that there are diverse external and internal pressures on companies that reinforce this emphasis on short-term performance, the relationship between companies and their investors is of fundamental importance. Encouragingly, both have become more vocal about the importance of combating the negative impacts of short-termism in recent times, such as through the Commonsense Principles of Corporate Governance, released by a group of CEOs in 2016. To create a truly sustainable financial system, which will play a role in achieving the SDGs, both investors and companies must join forces to drive meaningful change.
OVERVIEW OF RECOMMENDATIONS
Below is an overview of the recommendations, which are not comprehensive solutions, but aim to mitigate some of the most serious consequences of short-termism through changes in strategy and practice. They are framed around the belief that companies, with support from investors, can advance strategies that support long-term business growth and improve their impact on society and the environment.
- McKinsey Global Institute (2017): Measuring the Economic Impact of Short-Termism.
- Deutsche Asset Management and the University of Hamburg (2015): ESG and Corporate Financial Performance: mapping the global landscape.
- Examples include: Graham, J., Harvey, C. and Rajgopal, S. (2005): The Economic Implications of Corporate Financial Reporting, Journal of Accounting and Economics, Vol. 40, Issue 1. Graham, J., Harvey, C. and Rajgopal, S. (2006): Value Destruction and Financial Reporting Decisions, Financial Analysts Journal, Vol. 62. FCLT Global (2016): Rising to the challenge of short-termism.
- PRI (2016): Sustainable financial system: nine priority conditions to address.
- Accenture and UN Global Compact (2016): CEO Survey
- See endnote four.
- Aviva Investors (2014): A Roadmap for Sustainable Capital Markets.
- Sullivan, R. (2011): Valuing Corporate Responsibility: How Do Investors Really Use Corporate Responsibility Information?
- For example, solvency requirements, MIFID and Dodd Frank. Only in recent years (five years after the crisis) has there been growth in regulation looking at ESG integration and system purpose.
- (2016): Commonsense Principles of Corporate Governance
ABOUT THE UNITED NATIONS GLOBAL COMPACT: The United Nations Global Compact is a call to companies everywhere to align their operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption, and to take action in support of UN goals and issues embodied in the Sustainable Development Goals. The UN Global Compact is a leadership platform for the development, implementation and disclosure of responsible corporate practices. Launched in 2000, it is the largest corporate sustainability initiative in the world, with more than 9,500 companies and 3,000 non-business signatories based in over 160 countries, and more than 70 Local Networks. www.unglobalcompact.org
ABOUT THE PRINCIPLES FOR RESPONSIBLE INVESTMENT: The PRI works with its international network of signatories to put the six Principles for Responsible Investment into practice. Its goals are to understand the investment implications of environmental, social and governance (ESG) issues and to support signatories in integrating these issues into investment and ownership decisions. The PRI acts in the long-term interests of its signatories, of the financial markets and economies in which they operate and ultimately of the environment and society as a whole. The six Principles for Responsible Investment are a voluntary and aspirational set of investment principles that offer a menu of possible actions for incorporating ESG issues into investment practice. The Principles were developed by investors, for investors. In implementing them, signatories contribute to developing a more sustainable global financial system. More information: www.unpri.org