Investor time frames fall short of long-term climate problem

Here’s a note from Lindsay Stewart about this FT article:

Lots of food for thought here on materiality and misalignment regarding climate change and other sustainability themes.

According to the article, fund managers hold a share for just over three and a half years on average. If fund managers are thinking in years and many of their clients are thinking in decades, it shouldn’t surprise us that they’re reaching very different conclusions on what’s material. The important question is: how do we bridge the gap?

Here’s an excerpt from the article:

“We’ve got a long-term problem [climate change] but we still look at investment in a pretty short timeframe,” explains Alexander. “Much of this issue stems from the fact that a lot of these companies are listed.”

It is exacerbated by an industry focus on the one-year performance of investment funds, over and above three- or five-year returns. This leads to a “horrible behaviour finance effect”, whereby funds that outperformed in one year see a lot of investment in the next year, points out Rob Gardner, co-chief executive officer at investment company Rebalance Earth.

“Typically, a year or two later, often those funds end up being the worst performing — not because they’ve had a tonne of inflows, but because these things are cyclical and they are dependent on a particular theme,” he says.

This tendency to short-termism also affects the way funds invest. Across the fund management industry, the average holding period for shares is 3.6 years, according to data from Baillie Gifford — which is at odds with the long-term commitment of capital that is needed for structural sustainable change. “We are investing in companies who will navigate the transition well,” notes Catherine Flockhart, head of ESG at Baillie Gifford. “That is not going to happen overnight.”