Thursday, July 06, 2006

Short-termism and sustainability - an investor's perspective

Found a wonderful little speech from Al Gore (what can I say, I'm smitten) that he gave at the Institutional Investor Summit on Climate Risk in May 2005.

He focuses on two themes - the concept of short-termism among investors, and how to value sustainability within a company. Among the highlights:

The average mutual fund turns over its entire portfolio every ten months. I can make a case to you that that is functionally insane. Why? First of all because a long-term investor is supposedly investing in the value of the company. Sixty to 70 percent of the value of the average company builds up over a period of years.

The McKinsey Quarterly came out with a report that found this:...more than 80 percent of executives, said that they would cut expenditures on R&D and marketing to ensure that they hit quarterly earnings targets, even if they believed that the cuts were destroying value over the long-term. Eighty percent.

The practice of looking solely at the financial reports means looking only at a narrow slice of that spectrum of information. Yet the information that lies in a company’s environmental practice, employee practices and the other non-financial factors can also be very important.

Abraham Maslow, the great psychologist, once said, “if the only tool you have is a hammer, every problem begins to look like a nail.” And in the same way, if the only tool that we use to analyze what's valuable is a price tag, then those things that don't have a price tag can begin to look like they have no value.

You know, there are a lot of companies out there that have been whistling past the graveyard of big environmental risks. And, in fact, 10 of the largest 15 bankruptcies have occurred since 2001. That's partly an accounting artifact of the rising value of conglomerates, but it's also a result of some very large risks that go past the quarterly and the annual time horizon not being adequately analyzed and integrated into the assessment of value.

We're all here filling a kind of a policy vacuum. But...I believe -- we are here at an extraordinarily hopeful moment...I know there are tipping points in the political system also. Globally and nationally. And when GE moved and when Cinergy and Duke moved, that moved us closer to that tipping point.

When the leaders in the business sector begin to make their moves, before the policy vacuum can really be filled, there's one big, final step, and that is, for investors led by those of you who are here who have a requirement to take a long-term view decide to take the businesslike, commonsense, difficult but necessary steps to shift the perspective and integrate the data and start acting in ways that are fully faithful to your fiduciary responsibilities.

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