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.
Key takeaways:
- “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.
Presenters
Myles Corson
EY Global and Americas Strategy and Markets Leader, Financial Accounting Advisory ServicesBrian Tomlinson
Managing Director, Environmental, Social and Governance, Ernst & Young LLPPodcast
Season 5, Episode 6
Duration 34m 06s
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