Long-Termism – Another Casualty of 2020?
Andrew Dyson discusses the problems with widespread short-term investment decision-making and several timely reasons not to lose sight of the big picture.
As readers probably know, if like me, you are currently living in the UK, you have been in a complete lockdown since the start of 2021, going out only for essential shopping and local exercise. So, I have found myself with plenty of time for contemplation, but at least events in the markets have been offering plenty of distractions! For the first time in family history, I was alerted early to an investment issue by my children, in this case the GameStop saga (they are clearly much more in tune with the Reddit zeitgeist than I am). More recently, the markets and particularly the bond markets have suddenly – arguably belatedly – woken to the possibility of inflation (see my Q3 letter for a slightly more forward-looking perspective).
Indeed, while our investment teams have been poring over the projected timing and impact of inflation (reference Dr. Sushil Wadhwani’s recent commentary here), my focus is on the longer term and, in particular, I have been fascinated by the continuing acceleration of developments in the ESG space. I would pick out three interwoven strands at this point in time:
I would summarize that we are seeing, simultaneously, an increasing convergence of direction globally and, at the same time, an increasing divergence of what that direction might mean in each region. Now that can happen in any global enterprise, but I would argue that particularly in terms of ESG and climate, that divergence risks undermining the goals of what our clients, asset managers and our regulators are trying to achieve.
To start to shine a light on the challenges, I would argue that the right starting place is to consider what our clients who are adopting ESG actually want. This requires a high level of generalization, but in essence I would summarize that they want to see the behavior of corporations change, although the focus and direction of that change will potentially vary from client to client. So, for example, if you as a client oppose global warming, your goal is either to get those corporations who emit carbon dioxide to reduce their emissions directly, or to get them to be transparent about their emission activities with sufficient clarity that either the capital allocation process or customer base skews against them to force them to change. Now, you may also want to use your capital to accelerate development of alternative technologies that reduce CO2 emissions, e.g., hydrogen power or CO2 recapture, but the chain of cause and effect is much easier to influence here; subject to whatever legal and fiduciary constraints they operate under, a client is free to positively allocate capital to these new alternative technologies, should they so choose. The challenge is how your ESG aspiration as a client works its way through the “system,” i.e., a company with managers on behalf of shareholders and an asset-management industry managing assets for clients, since the system creates a range of agency effects that can obscure your goals.
What do I mean by “agency” effects? As a general economic term, these arise when the will of the end user is enacted through agents of any sort and the interests of the agents and hence their potential actions diverge from those of the end user. Where do I see agency effects in the ESG cycle?
So how can we, as an industry, try and counteract these agency effects to better increase the chances of achieving what both the clients and many, if not all, asset managers want? Of course, because we are counteracting agency effects, it follows automatically that this may not suit every individual player, but the stakes are too high to let that be a deterrent. Here is my manifesto!
Of course, your manifesto may be different! But I do hope you share my view that we should try and address these issues early and cohesively, before we all head off in different directions. The further apart we allow ourselves to get, the harder it will be to get back together without perceptions of winners and losers. The underlying paradox is that, potentially, this is an area where the greater the plethora of individual efforts that go in, the less effective we risk being at achieving what we all collectively want!
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