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At the end of August near Zurich, Switzerland, institutional investors, asset managers and listed companies gathered at the Swiss Re Centre for Global Dialogue to share thoughts on how to promote more long-term approaches to financial performance.26 The speeches generally emphasised the challenge that short-termism in financial markets is not helpful for companies wanting to plan for long-term value creation, incorporating attention to value arising from sustainability. However, the dialogue did not progress far in identifying mechanisms for promoting long-term approaches, especially those that might be significant enough to turn the tide of short-termism that has been filled in recent years by the growth of short-selling techniques by hedge funds. The challenge was summed up well by David Russell, speaking to the Financial Times (FT): 'The investment process in the last 20 years has generally gravitated towards shorter term and relative returns. Pension funds have long-term liabilities to manage.' The senior adviser on responsible investment at the Universities Superannuation Scheme did not mince words, adding, 'We can no longer rely on short-term relative investment processes when we have liabilities stretching out for decades.'27
A number of initiatives seek to address this challenge. The Marathon Club is a group of investors looking at ways to encourage investment for the long term.28 In August, it released a summary of investors' responses to its discussion paper on how to promote long-term long-only investing. 'There is wide recognition that a long term approach requires a more comprehensive and in depth understanding of investment issues by trustees, prompting some respondents to suggest the need to develop appropriate governance structures and define further the scope of trustee education.'29 Trustee awareness was identified as a key lever for change.
The importance of two other initiatives, previewed in the World Review of JCC 19, began to be recognised in 2006. Reporting on environmental, social and governance (ESG) issues grew as a result of the the Enhanced Analytics Initiative (EAI), which commits its members, which include BNP Paribas, USS, Investec and Hermes, to spend 5% of their brokerage fees with firms that focus on extra-financial indicators.
In July, the FT reported on the significance of the new UN Principles for Responsible Investment (UNPRI). These principles are backed by investors responsible for more than $4 trillion-worth of assets, or about 10% of global capital. UNPRI also commit signatories to integrate ESG, or extra-financial, issues into conventional investment analysis; to become active, responsible owners by promoting good corporate practice in these areas; and to report transparently on what actions have been taken in this area. The initiative promises to generate a global impact for the Global Compact, which is where it's now located within the UN system. Paul Clements-Hunt of the United Nations Environment Programme Finance Initiative (UNEP-FI), which conceived the UNPRI, told the FT that 'the signatories know they have to show that PRI will change things. It shows the investment community that these issues are mainstream.'30
What is noteworthy about these principles is they recognise that ESG issues have an effect on the long-term performance of companies. 'For the best part of 25 years, these factors have been a niche part of SRI [socially responsible investing],' said Marc Fox, a member of the ESG Research team at Goldman Sachs. As ESG issues enter the mainstream of investing, there has been a subtle change in terminology, reflected in the articles and press releases. No longer referred to as 'non-financial' issues, ESGs are now described as 'extra-financial', to highlight both their materiality and their additionality to the norm. Thus the conceptual frames of finance and investment might be moving towards the whole-systems theory of value and valuation that was described in JCC 19.
But what of the practical implications? How does one create a truly long-term mandate? Emma Howard Boyd, Head of Socially Responsible Investment at Jupiter Asset Management, put forward a suggestion: 'You have to look at other ways of incentivising fund managers.'31 Translating the diagnosis of systemic contradictions into proposals for specific changes in rules and norms to incentivise different practices from finance professionals is the central challenge.
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