Ending Quarterly Capitalism
By Mindy Lubber
Quarterly capitalism – a system that drives far too many CEOs, directors, investors, and analysts to focus on short-term performance and return on investment – is on a collision course with reality. In the risk/reward equation that fundamentally drives capitalism, the majority is heedless to the long-term risks of climate change, water scarcity and other game-changing environmental and social threats that will also be financial game changers for the global economy.
A new research paper issued last week by London-based Generation Investment Management, Sustainable Capitalism, has some alarming news about just how short-sighted this quarterly capitalism has become.
A group of top asset managers attending a recent Morgan Stanley sponsored conference were asked about their investment time horizon. Fifty-five percent said a quarter or less; only 20 percent said more than a year. Another survey revealed that 78 percent of managers would reject an NPV (net present value)-positive project if it would lower quarterly earnings below consensus expectations, and 80 percent would focus on this short-term metric at the expense of building long-term shareholder value.
This should send shivers down the spine of every investor looking for long-term value creation because climate risks alone could cost investment funds $8 trillion by 2030, according to Mercer, a global financial consultancy.
But it’s not hard to see why this short-termism is so pervasive. Average CEO tenure has dropped from eight to four years over the past generation, giving CEOs more incentive to manage for the near-term and avoid decisions that may make long-term sense even though they don’t immediately improve the bottom line.
For example, managing the long term risks of climate change may require near term investments and commitments to new technologies, new personnel and new risk assessment tools that a CEO may just as soon leave to his or her successor. But most compensation packages are linked not to long-term value creation and skillful management of long-term risks, but to quarterly or annual bottom line performance. Investors, too, demand quarterly performance and generally fail to examine how companies are preparing to manage climate and other environmental risks or even to exploit promising opportunities in clean energy innovation that are our best defense against catastrophic climate change impacts.
The good news is that there is a growing consensus among corporate leaders and institutional investors that today’s major sustainability challenges such as climate change and water scarcity present major risks and opportunities for businesses, and that managing those risks and seizing those opportunities will be a key to success in the 21st century economy.
As we outline in the Ceres Roadmap for Sustainability, such success will require that boards of directors of both companies and large institutional investors, who owe a fiduciary duty to their shareholders and beneficiaries, become the agents of long-term value creation. It means CEOs and top management must educate themselves about these risks and opportunities and put their companies in a position to adapt and succeed in a world of growing environmental and other sustainability risks.
And, finally, it means every player in the entire investment value chain – corporations, institutional investors, policy makers, financial and equity analysts, market makers, regulators, advisors, asset managers and the financial media – must look further down the tracks or risk being run over by the train.
Mindy Lubber is president of Ceres and director of the Investor Network on Climate Risk (INCR).