ESG thinking offers alternative to “short-termism”

Long-term attention to environmental, social and governance (ESG) principles is a natural antidote to dangerous short-term thinking in business, says a vice-president of J.P. Morgan Asset Management.

Jack Manley, a global market strategist with the company’s global market insights strategy team, says ESG offers a cure to “short-termism” — something senior business leaders around the globe have begun to be concerned about.

“The issue is so prevalent that the U.S. Securities and Exchange Commission recently held a summit on exactly this subject,” he said. “The issue, at least in part, is that quarterly reporting requirements, which are done for the benefit of investors by increasing transparency into day-to-day business operations, are actually having an adverse effect in the sense that investors care too much about short-term results instead of focusing on long-term results.”

Manley said the increasing influence of ESG thinking, which requires a lot of forward planning, offers an alternative to making short-term moves designed to have immediate — and likely short-term — impacts on stock prices.

Aiming for ESG improvements gives executives a bigger prize to focus on.

“The global cyclical upswing we’re already in the midst of is lifting corporate expectations for future consumer demand. In other words, as a direct result of Covid, some companies are feeling more confident in longer-term investments paying off because they know there are going to be consumers out there to buy their products,” he said.

“If we can indeed see less focus on short-termism, we will inherently see a greater focus on ESG-type spending,” Manley said. “Maybe instead we see improved benefits for employees. Maybe we see greener sources of energy. Maybe we see greater community outreach. All of these things, I think, are possible if we move away from short-termism.”

Manley said a broader definition of ESG investing — away from simply a strategy that punishes bad actors and toward a means of rewarding forward-looking companies — has brought money off the sidelines.

“[This] has made ESG in general more accessible for investors that may not otherwise consider themselves to be extremely politically or socially conscious,” he said.

To move the ESG conversation from a moralizing conversation to one about performance, Manley suggested it is necessary to look at the broader trends rather than individual actions. For example, advisors could talk about investing in high-growth tech companies that provide battery tech or make semiconductors, instead of talking about climate change. 

“The end result might be the same, but the language used is going to bring more money off the sidelines,” he said.

Manley cautioned, however, that there is no one-size-fits-all solution for investors.

“There are going to be different priorities when it comes to your moral code, your ethical code. The guy that feeds his family by working at a coal mine probably does not want to be told that he contributes to what some may consider to be a societal evil,” he said. “And so, for this reason, I think communication and education around ESG need to improve to make the story more about capturing growth trends of the future, [and] less about achieving a position of moral or ethical superiority.”

Around the world, studies show that more people are becoming more politically active, and governments are waking up to ESG realities and becoming more responsive to popular demands for sustainability.

“Democratic governments — or really any government that hopes to stay in power peacefully — should at least in theory act on the will of their people. And this means that popular sentiment should help to drive government policy,” Manley said.

“Ten to 15 years from now we probably won’t even be having this conversation about ESG, because I think ultimately the end goal is for ESG to be completely integrated into all facets of investing. As we move toward renewable resources, as we continue to pursue diversity of representation, as we continue to run our companies more effectively, these parts of the market that are considered non-ESG are going to move from being the majority to the minority and may eventually even disappear entirely.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.