Short-termism in investment markets is a major obstacle to companies embedding sustainability in their strategic planning and capital investment decisions.
The short-term performance pressures on investors result in an excessive focus on quarterly earnings, with less attention paid to strategy, fundamentals and long-term value creation. Many companies respond to these pressures by reducing expenditures on research and development and foregoing investment opportunities with a positive long-term net present value. As a result, companies are discouraged from developing sustainable products, investing in measures that deliver operational efficiencies, developing their human capital, or effectively managing the social and environmental risks to their business.
It is possible for companies to act long-term in a short-term world. Companies must:
- COPE with short-termism in their existing investor base:
- Companies should develop, implement and communicate sustainability strategies that provide clear financial benefits (e.g. cost reduction, improved efficiency) over the short-term
- SHIFT to a more long-term oriented investor base:
- Companies should confidently communicate and demonstrate how their business strategy, including their approach to sustainability, will create long-term value for their investors
- Companies should reconsider producing quarterly earnings guidance. Consider reporting on issues and metrics that are of relevance to the longer-term success of the business
- CHANGE the capital markets
- Companies should encourage policymakers to adopt measures that enable companies to take a longer-term approach to sustainability-related activities and investments
- Companies should take a long-term approach in their own investment practices and in the investment practices of their pension funds
Learn more about how your company can combat short-termism by reading Cope, Shift, Change.