Home ListingApril 14, 2016

S&P: Asset Owners ‘Hold the Key to Long-Termism’

Institutions cannot rely on company boards to tackle other investors’ short-term focus.

Reported by Featured Author

Changing investment strategies have a greater effect on long-term investing than putting pressure on individual companies, according to S&P Dow Jones Indices (S&P DJI).

“Long-term metrics should be viewed as equal in importance to generally accepted accounting principles.”Major asset owners “are starting to realize that the single most effective way to deal with short-termism is by changing the investment strategies,” wrote Kelly Tang, a research director at S&P DJI, and Christopher Greenwald, head of sustainability investing research at RobecoSAM.

However, they are often hampered by the lack of consistent, tangible data measures.

“To institute real change, there has to be a paradigm shift,” Tang and Greenwald wrote. “The asset owners who control the capital have the leverage to effect real change.”

While activist investment funds can be seen to force through change at individual companies, such actions are typically focused on “encouraging short-term behaviors at the expense of long-term thinking,” the authors added.

The paper also cited data from the New York Stock Exchange illustrating that the annual turnover of stocks rose from roughly 20% in the 1970s to peak at roughly 140% in 2008.

“In transitioning to long-termism, an important constant is for investors to incorporate long-term metrics, which should be viewed as equal in importance to generally accepted accounting principles,” Tang and Greenwald said.

Asset owners should make greater use of data around “executive compensation, detailed risk-management analysis, and increased shareholder engagement,” the paper said. As well as emphasizing the importance of governance issues, investors should also dedicate more resources to analyzing environmental and social risks, such as the effects of climate change on their portfolios and the strength of corporate cultures at the companies they own.

Major investors “hold the key” to a greater focus on the long term, Tang and Greenwald concluded, “as their buy-in to long-term thinking could facilitate the process for other key players, such as asset managers, corporate boards, and company executives, to move away from short-termism.”

The paper follows the launch of the S&P Long-Term Value Creation Global Index in January, backed by the Canada Pension Plan Investment Board and supported by institutional investors from the Netherlands, New Zealand, Denmark, Canada, and Singapore.

Read the paper in full, “Long-Termism Versus Short-Termism: Time for the Pensulum to Shift?”