Investing in the long-term in the short term – the role of investors in tackling systemic risks

Head of Board Advisory, South Pacific Region at Nasdaq, Nicholas Chilton chaired a keynote session titled The Role of Investors in Tackling Systemic Risks to a packed room at Governance Institute of Australia’s 39th National Conference.

Nicholas Chilton was joined on stage by IFM Investors Chief Executive Officer, David Neal, who delivered the keynote presentation, with their session quickly highlighting the challenges investors face in striking the right balance between short-term economic risks faced by growing inflationary pressures and longer-term systemic risks, such as decarbonisation, inequality of opportunity and housing affordability.

Key lessons:

Continuing with the theme set out by Elis and Signe Olsson Professor of Business Administration, Darden School of Business, Professor Edward Freeman—the conference’s keynote speaker on day one—David expanded Professor Freeman’s idea of “thinking about the long-term in the short-term, otherwise change will never happen” to “we need to think about the long-term in the short-term so that we can make the right decisions now, at the right pace, to address long-term risks.”

Speaking to a crowd of 500 registrants, who attended in-person and online, Mr Neal and Mr Chilton discussed the effects this new way of thinking had on superannuation funds, where systemic risks were fundamentally tied to long-term returns and, therefore, close consideration of these risks in investment strategy is part of the fiduciary duty of the fund manager.

Neal warned that not seeking orderly solutions to these systemic risks through sustained investments has real and severe consequences for future returns.

“According to a conservative scenario analysis by the European Central Bank, a disorderly climate transition could cost European investors 14 per cent by 2035. If we expand that to the $50 trillion in global pension assets a disorderly approach could result in more than $7 trillion in lost superannuation funds,” Mr Neal said.

Neal also warned investors must engage in the transition process to ensure it is sustainable and orderly.

“You can’t stock pick or diversify away from these risks,” Mr Neal said.

An underlying issue was the clash of the political environment with sound investment strategy, especially where government-controlled certain levers that would enable robust return on investment for investors in social infrastructure assets.

According to the Association of Superannuation Funds of Australia (ASFA), Australia’s superannuation pool has assets over $3 trillion.

Headline issue for 2022:

In addressing these systemic risks, as they now dominate the social and political discussion, there must necessarily be a maturation of the discussion to the end that we can reconcile profit and purpose, the stakeholder and the shareholder not as competing priorities, but as complementary parts.

The headline issue of 2022 has been the gradual maturation of this discussion in the boardroom, fuelled by political change, intensifying natural disasters and an increasingly informed and frustrated younger generation.

Key session takeaways:

• While the discussion focused on the investor, particularly the superannuation or pension fund manager, the learnings are not limited to the investment sector.
• Underpinning the discussion was an urge to connect these highly politicised systemic issues, such as climate resiliency and social inequality, to the profits and sustainability of companies in the long term.
• These points present the obvious challenge in how to separate the political from the practical when considering action on these issues as a company.
• While companies are stakeholders in the public-political process of transformation, they must also be wary of capture in the public-political discussion. For this reason, directors should take note as long-term strategic stewards that their discussions around corporate responsibility are not fuelled by a compliance or reputation-focused mindset.
• Rather, investing in these issues in the short term should be considered as a business value proposition. That is, considering a five, 10 or even 20-year lens, they should be asking not only whether the company is positioning itself well for that future, but what role they are taking in actively shaping that future to be sustainable and stable for their business.

Further information:

Nasdaq Governance Solutions is a Gold Sponsor of Governance Institute of Australia’s National Conference 2022.

Nasdaq Governance Solutions supports public, private, and non-profit organisations worldwide on their journeys to achieve board effectiveness and drive governance excellence.

Expanding on top corporate governance issues in Australia — and best practices on how to respond to such issues — download the Nasdaq Governance Solutions guide here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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