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Drag fishing, using fossil fuels and taking a slapdash approach to safety can generate attractive short-term returns, but in the long run these approaches may prove damaging in a number of way, warns a new report from Forum for the Future.
The report says financial markets have become too focused on short-term investments that ignore future risks and wider consequences. As well as not delivering the best social and environmental outcomes, financial short-termism may also affect financial returns for investors. Forum for the Future says the problem is systemic and sector-wide, with no real incentives to change.
"There are so many different contributing factors," says Alice Chapple, director of sustainable financial markets at Forum for the Future. "Problems with structural incentives, the belief that short-term returns churned out will lead to longer-term returns, or, with pensions, for example, that asset managers always work in our favour when probably they aren't."
To counter the idea that short-term strategies always work in a company's favour, Forum for the Future cites examples where it says companies have clearly lost out through short-term thinking. BP made significant financial losses after the Deepwater Horizon offshore oil rig exploded last year, killing 11 people and spilling out oil in the Gulf of Mexico. Forum for the Future says that "decisions to cut corners in pursuit of short term returns" contributed to the crisis, which greatly damaged the company's reputation and the environment, as well as its finances.
The authors of the report also argue that while fossil fuel companies can be attracted to good returns during times of high oil prices, the longer-term problem of higher carbon emissions affects the environment and the economy.
In the 1990s, the decimation of the cod population in Newfoundland, Canada, from drag fishing, resulted in a loss of 40,000 jobs, according to research by Greenpeace. "A longer-term perspective would have yielded greater returns for more investors over a longer period of time, and would have avoided these catastrophic ecosystem and community impacts," the report says.
There is a need to balance short-term investments in the financial markets with longer-term thinking , but an exit strategy practised by many companies makes this impossible. Investors, able to maximise financial returns by "getting in and out at the right time" means there are few incentives to act more responsibly. Because of this, initiatives by NGOs, policy-makers and other organisations and businesses have been slow to work.
Forum for the Future says the structure of the financial sector also supports this approach. It says lower transaction costs and IT have aided shorter holding periods – the length of time a trader holds an asset before selling it – while an increase in the use of intermediary investment and asset managers, which lengthens the "investment chain" between companies and investors, leads to "less detailed analysis of the drivers of longer-term value".
Evidence that short-termism is endemic can be seen in New York Stock Exchange figures, the authors say, where the turnover of listed companies increased dramatically from 10-30% during a 40-year period to 1980, but more than 100% in 2005.
A lack of leadership may also be to blame. Research carried out last year by Andrew Haldane, executive director of financial stability at the Bank of England, showed that in 1995 the mean duration of chief executives departing from the world's largest 2,500 companies was just under a decade. By 2009, this had fallen to around six years, most notably in the US, Canada and parts of Asia.
A lack of information between companies, asset managers; the right cultural and financial incentives for leaders and legal obligations have also contributed to a lack of change in the financial system. However, some companies are taking a longer-term approach. While the report cites a 2009 survey that found the majority of financial officers would bow to pressure of investors to gain quicker short-term returns, there had been a shift for some.
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It says companies such as Unilever have shown they can make a shift in their business model and have recognised there are opportunities to be made. Leadership at Unilever has been important, says Chapple. "Many of the companies we work with say they would like to create more sustainable products and practices but they're not valued by the market," she explains. "Paul Polman at Unilever has been clear in his approach that looking further down the road will be important for the company, for example on the issue of water resources.