This ESG-themed episode features Brian Tomlinson from Ernst & Young LLP and Ariel Babcock, Head of Investment Stewardship at Fidelity Investments and formerly Head of Research for FCLT Global.
FCLT’s research of short- and long-term business strategies has found that the pressure for quick projects and fast payoffs may trigger poor outcomes and investment value erosion. In fact, short-termism is experiencing some market pushback due to the constraints it places on decision-making relative to longer-term investments.
It seems clear that short-termism does constrain companies’ appetite for investing in environmental, social and governance (ESG), primarily due to ESG’s inherent medium- to long-term payoff. ESG investments may be minimized or cut entirely to hit short-term earnings goals, possibly undermining shareholder rights as a result. Particularly in turbulent economic environments where companies tend to hoard capital, long-term goals may be weakened or overthrown.
However, consequences have been noted. A CFA Institute study of companies between 1996 and 2008, where financial executives sacrificed long-term investments in R&D, selling, general and administrative expenses (SG&A), and capex in favor of short-term gains, concluded that those companies tended to underperform in the midterm (three to five years). The estimated cost of short-termism in that 22-year period was US$1.7 trillion.
In contrast, a 10-year study conducted by FCLT after the financial crisis concluded that companies that consistently maintained longer-term investments rebounded more quickly post-crisis and outperformed their short-termism peers.
One notable influence of long-termism is the decline in quarterly earnings guidance and the emergence of progress reports toward long-term strategies that are shared with the broader stakeholder community. Quarterly guidance puts an enormous amount of pressure on companies to hit certain numbers to meet marketplace expectations.
- “Un-silo-izing” ESG investments and broadly communicating its opportunities and progress to stakeholders can help remove ESG’s stigma as solely a long-term cost. Similarly, integrating sustainability teams into business units can help build awareness, buy-in and collaboration among teams.
- ESG disclosure communications are increasingly taking the place of quarterly earnings meetings.
- Long-term-oriented companies who communicate long-term strategies tend to attract long-term investors.
- Major innovative breakthroughs may not happen in one-to-three- year timeframes.
For your convenience, full text transcript of this podcast is also available. Read the transcript.
Season 5, Episode 6
Duration 34m 06s
In this seriesSeries overview
Season 5, Episode 5
Season 5, Episode 4
Season 5, Episode 3