8. Decent work and economic growth
In a panel on “Investing Wisely” held at Horasis Global Meeting last week, a New York-based investor in the audience challenged the panelists with: “while you are praising long-term investing, my average holding period is 7 seconds – and I make money.”
Short-termism vs. long-term investing has long been a topic of discussion in financial markets. While long-term perspectives may have a higher probability of maximizing returns, investors face real barriers when casting their eyes on larger horizons such as regulations (timelines and penalties imposed by regulators), herding attitude (a tendency of investors to move together in their investment strategy), lack of data on corporates’ long-term planning, ambiguity aversion, among others.
In recent years, sustainable investing delivered a fresh push toward long-term investing. While ESG integration is an investment discipline that can be applied to different timeframes and is getting adopted even by hedge funds, it may be through long-term perspectives the opportunities it generates – from a risk mitigation and return perspective be better maximized.
Yet, the market has faced immense difficulty in fully capturing long-term opportunities mostly due to a lack of high-quality data. In recent years, companies such as Merck, UPS, or Unilever have presented their company’s long-term plans (+5 years) on capital allocations, corporate governance, or on industry and mega-trends, for instance, to help investors looking further in time. But only a few follow these practices, and long-term investing remains challenging.
To address this, Matarin Capital Management, a New York-based investment firm, together with S&P Dow Jones Indices and the research and data provider Sustainalytics have joined forces around The Matarin Global Long-Term Index, which was designed to allow investors to capture a “patience premium” for long-term investing in the stock markets, which integrates a focus on ESG factors.
High scoring Patience Premium stocks exhibit attributes such as fundamentally sound businesses, shareholder-friendly leadership, inexpensive valuations, and positive progress toward sustainability.
The Index looks at a company’s current E, S, and G rankings compared to a multi-year average and excludes from consideration companies worst in class in terms of ESG controversies. Matarin has found these companies’ stocks tend to underperform in the long run.
“Similar to the term structure of interest rates, in which longer-term bonds offer higher interest rates, equity investors may also earn a “patience premium” for longer-term investment. When companies invest in becoming more sustainable, there can be an immediate cost in the early years on cash- flows or earnings in the short-term focus. But in later years, progress toward sustainability can pay off,” says Nili Gilbert, co-founder and portfolio manager at Matarin Capital.
While not exclusively designed to capture the “patience premium,” several other indices are already pointing at the benefits of considering ESG long-term perspectives. If we take a look at indices such as MSCI Emerging Markets, MSCI Europe Index, or MSCI ACWI and compare them with their respective ESG indices, 10-year returns are +3.7, +1.81, and +0.41, respectively.
Family offices, which are less susceptible to the pressures of short-term returns, may indeed be more aligned with the need to generate real and lasting value over the long term. As more listed companies disclose their long-term perspectives and as indices are increasingly able to capture the premium unlocked by long-term perspectives, we are likely to see more family offices investing with longer time horizons.
This content was originally published in Granito Group.
We all have a role to play
With just ten years to go, an ambitious global effort is underway to deliver the 2030 promise. We want to take a stand and we are calling on our community to showcase how they are contributing to the 17 Sustainable Development Goals, whilst influencing more and more people to unravel their role to play.
Here, you will find four different ways your ideas can flourish, dialogue can be enhanced, and action can take place. You can choose one or all four, and Nova SBE will be there to support you all the way and guarantee tangible change.
We all have a role to play, and this is your way in.