In the current era of the 24-hour news cycle, focusing on the long term can seem like a novelty. And yet many corporate executives and investors have begun emphasizing the benefits of looking beyond the upcoming quarterly or annual financials. However, not everyone agrees that longer-term thinking is a worthy priority, and some disagree about the length of time worth prioritizing.
Mergermarket on behalf of Toppan Merrill spoke with four experts to explore the most important factors influencing long-termism in the current environment.
Toppan Merrill question: What effect, if any, do you think the push for ESG investing – and, to a lesser degree, a re-imagining of the corporation as a social enterprise – is having on a move toward long-termism? Do you think these efforts could have a meaningful effect? Leading industry experts weigh in...
Timothy Coffin, Breckinridge Capital Advisors says: To put my answers in perspective, Breckinridge is an investment-grade fixed income manager – offering both sector- focused and multi-sector strategies. We currently manage about $37 billion in assets, and we have integrated ESG across all our fixed income strategies. So much of the history of responsible investing – which has evolved into ESG investing in some cases – has been written in the equity markets in negative screening or shareholder activism. But because ESG issues may be powerful as risk-mitigation tools, it actually seems to be much more of a natural fit for the fixed income markets.
I think ESG is precisely about long- termism, or what I would consider a return to long-termism, and the rigorous type of investment research that really demands. And there are two main reasons for that. First, here at Breckinridge we see a changing face of business. According to the Governance and Accountability Institute, the number of companies in the S&P 500 that publish corporate sustainability reports went up from a little over 20% in 2011 to over 80% in 2017. This demonstrates that from the board level down, many of the biggest, most recognizable companies understand that sustainability is a strategic imperative. As investors, if we're seeing these companies managing their business in this way, we need to be paying attention to that.
Second, there is also a changing face and pace of risk. The value of many of the world’s largest companies is 70-80% intangible – it's driven by things like brand and reputation. So, by fully integrating ESG into our credit research, we believe that we’re able to identify symptoms of idiosyncratic risks, such as a history of environmental infractions, or opaque governance, or not enough diversity on the board to encourage innovation. We believe this added rigor can help price risk better.
I would also say that I don't think the notion of the corporation as a social enterprise is really a fundamental change. You would be hard pressed to find a business who doesn’t think they serve a social purpose. If business doesn't serve a public benefit, I don't see how any investor would look at it as a sustainable enterprise. Maybe some short-term investors or trading algorithms have lost sight of that, and in those cases, I think that ESG investing is having a meaningful effect, by helping to raise investors’ sightlines on the horizon.
Charles Nathan, Finsbury adds: One challenge in answering this question is that ESG means a lot of different things to different people. There are people who talk about ESG and its relevance to investment strategy – they make very clear that it’s an economic connection. They care about ESG insofar as it is tied to how corporations will function as economic units and produce value for shareholders. Then there are folks who refer to ESG in the context of the corporation having a purpose beyond shareholder value, which is a different way of thinking about a company.
So you've got this huge tent with all sorts of investors talking about ESG and really meaning very different things and having different viewpoints. And one person's solution is another person's pie-in-the-sky or value destroyer. None of this is simple. That's a problem with labeling – people tend to think in terms of convenient labels, but in fact, it's so much more complicated.
All that being said, I think ESG is a terrific idea on many levels. It makes a lot of sense. If you were going to invest in a coal company, I would say you need to understand how that company is adapting itself in the face of pressure over the use of fossil fuels. Do they have a long-term business model? Will their business model cease to be profitable? Are they diversifying risks? I think that thinking in those terms makes perfectly good sense.
Andy Green, Center for American Progress weighs in: ESG reporting can be a key tool for change. I am strongly in favor of having a transparent conversation about what's going on, of empowering policy makers to make decisions, and of empowering the investors that do have those longer-term interests to throw their weight around in the ways they think are important, not just for their social purposes but for their own bottom line.
This is not to say that the markets have performed perfectly, as I would wish them to. There have been companies that have raised wages, and have been punished by the market for doing so, or markets will take a look at CEO pay ratios and say, "Well, why is yours this low? We want higher, not lower." Markets are not always the progressive vehicle for social change that I might want them to be.
But there is definitely a positive transition going on as more investors are integrating ESG factors, as millennials are demanding more responsible investing, as economic studies are coming back and saying that ESG is correlated with corporate performance, and as business leaders increasingly recognize that failing to take care of workers, the environment, and the public interest has very serious consequences for our country and society. The freedom that we enjoy in a democracy very much depends upon us moving away from a short-term extractive form of capitalism toward a long-term vision of shared positive outcomes.
Sarah Williamson, FCLTGlobal says: In order to be a responsible investor, horizons need to be anchored in the long term. As investment horizons lengthen, investors are more likely to need to integrate ESG factors into their strategies. Investing for the future means considering shifting global demographics, climate change, and any number of factors that a company 20 years ago could delay action on. But that future is here and now. Being cognizant of these factors’ impacts is a critical part of investing for anyone with a long-term horizon. In that sense, ESG integration has become a necessity to an overall long-term approach to investment. Long-term investing has had a marked effect on the rise of the concept of a corporation as an instrument of social enterprise – truly long-term-oriented companies treat their employees, customers, and larger community well. This new dynamic puts more focus on stakeholders and an increased importance on widespread value creation and societal impact, which in the long run should drive shareholder value as well.
