Investor horizons – a shift towards long-termism?
The IIRC strategy rightly emphasizes building a bridge from corporate reporting to investment decisions. In other words, ensuring that integrated reports have an impact with providers of financial capital and are used in investment appraisal and to inform how capital is allocated. This was always an ambitious strategy given the well-documented short-termism in capital market systems.
However, one notable development in 2015 was the increasing importance to many investors of ‘ESG reporting’. A range of surveys produced by, for example, EY and the CFA Institute, among others, demonstrated that investors are increasingly using environmental, social and governance factors in their decisions. This was also confirmed in a round table hosted by Hermes and Black Sun last November.
It is tempting to see this as a milestone – and indeed it is notable progress. But of course analysts have always considered a range of factors in their appraisal and not just the financials. And while the ESG genesis is partly a response to the impact of climate change, it would be naïve to suggest that a core factor is not the need to manage risk especially for those investment prospects which have higher exposure to ESG factors. Indeed, surveys confirm that ESG is seen as a means of managing risk and narrowing the parameters around expected return on capital.
This in itself is not a bad thing. And it answers the question posed by heads of reporting throughout <IR> Networks as to whether investors are using the information they produce. But in our view this is not the shift to a multi-capital approach to value creation which we still need to see in order to align investment decisions to wider goals of financial stability and sustainable development.
Further catalysts to change
So how can we move beyond ESG? Especially in the light of historic climate change agreements, the desire many organisations now have to contribute to sustainable development goals (SDGs) and the need to value investment opportunities where the business model is entirely driven by human and intellectual capitals.
The next step is to embed the concept of long-term value creation in capital markets, based on the multi-capitals approach to value creation which has been pioneered through the global <IR> movement. Two powerful developments could make a step change.
- The CEO of BlackRock, Larry Fink, has written a letter to CEOs at Standard & Poor’s 500 companies and large European corporations. His letter talks about tackling short-termism and urges companies to report on their strategy – it says: “We are asking that every CEO lay out for shareholders each year a strategic framework for long-term value creation. Additionally, because boards have a critical role to play in strategic planning, we believe CEOs should explicitly affirm that their boards have reviewed those plans.
- In a further development, Standard & Poor’s has introduced the S&P Long-Term Value Creation (LTVC) Global Index, designed to measure companies that have the potential to create long-term value based on sustainability criteria and financial quality. This will provide the investment platform for companies whose goal is aligned to the call made by Mr Fink.
The third important step is for <IR> to become embedded in these developments as the means for providing information to investors that will help them appraise value and performance in the light of these drivers. There is evidence for this. A study by KPMG and the National University of Singapore applied the underlying concepts of the Framework to a group of 80 firms in the Asia Pacific. The report states that <IR> helps firms focus on aspects that materially affect their long-term ability to create value. One of the main findings of the study is that companies that disclose more than just financial information started outperforming their control group in mid 2010, at around the same time as the introduction of <IR>.
These are developments that can move the thinking from outputs – considering wider factors in investment appraisal – to outcomes – the move to long-term value creation, aligned to financial stability and sustainable development. That would be a truly integrated story.