The writer is chief executive of FCLTGlobal, a non-profit that researches long-term investing
In Europe, the regulatory pressure on environmental, social and governance issues is strong and growing stronger, from new rules on reporting such data and integrating it into investment decisions to required disclosure of ESG risk analysis.
In the US, the regulatory momentum is going the other way. The Department of Labor has proposed amendments to its rules covering pension plans that would require administrators to prove that they are not sacrificing financial returns by taking ESG factors into account. US regulators have also shown little interest in providing guidance on which metrics might be most appropriate for companies to disclose.
Why are we seeing not just divergent, but diametrically opposed, positions? The answer lies in time horizons. In this case, Europeans are taking a longer-term view about value creation while the American regulators are focusing on the short term.
The US position is that the fiduciary duty of pension plans is to provide “retirement security for American workers”, rather than addressing ESG concerns, or issues regarding social welfare more broadly. The European position is one of “double materiality” — considering, for example, both the impact of the investment on the climate as well as the impact of the climate on the investment.
Splitting retirement security from social welfare creates a false dichotomy. Those who oversee retirement plans are charged with providing pension payments to members decades from now. That means they need to invest not for next quarter, next year, or even the next three years — but for decades. They must identify society’s most pressing problems, such as climate change, discrimination, and unfair wages, and recognise that they will affect the long-term results of companies and economies they invest in. In the long run, values and value converge.
Institutional asset managers and asset owners are in a unique position to act. Climate change creates both risks to some investments and opportunities to allocate capital toward innovations and solutions. Estimating the impact of climate change is critical to choosing investments. Companies and investors who incorporate these risks and opportunities into their decision-making process today are more likely to find financial success because they are helping to build an economy that is more likely to be sustainable and resilient.
All else being equal, the financial value of companies that focus on the future will be higher than those that cling to outdated cultures and norms. The McKinsey Global Institute and FCLTGlobal analysed 615 large and mid-sized publicly listed US companies from 2001 to 2014, dividing them into long-term and short-term companies based on five factors including earnings quality and margin growth. Long-term companies added more jobs and market value and grew their revenue by 47 per cent more than those with a short-term outlook, and with less volatility. Long-term companies were also better able to weather the 2008 global financial crisis and its aftermath.
A clear relationship exists between a company’s culture, business practices, and place in society and its ability to achieve sustained positive financial results. Investors should not only seek out organisations that already prioritise forward-looking practices but also push for change at organisations whose business practices are lagging.
Investors cannot ignore risks and opportunities that will affect the value of their investment in the long term. Whether in the US or Europe, the fact that those risks and opportunities are labelled “ESG” does not make them any less important.
Mark Wiseman, co-founder of FCLTGlobal, also contributed
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