Summary: Many of the interventions in Sustainable Finance are driven by an belief that financial markets are short termist, that they focus too much on near term profits and not enough on long term value creation. But what if this wasn’t true. What if markets are actually long term focused, but that they believe that the pace of the sustainability transitions will be so slow that the business as usual scenario is still financially optimal.
Why this is important: If markets really are long term focused, this gives us some important levers. One is to change the narrative, to persuade the financial markets that starting to change now makes more financial sense than waiting. To do this we need two things. We obviously need action by governments, but we also need action from the providers of capital, the savers. They need to put pressure on their representatives, the pension funds, asset managers and the like, to build a system that creates the outcomes, both societal and financial, that meets their needs. For this to happen they need education.
The big theme: We all know that if the planet is to achieve its decarbonisation and transition targets, we need to engage the private sector. Just to deliver net zero, we need to invest $4-5 trillion every year out to 2030. This is over double what we invest now. On top of this we also need to invest to preserve and rehabilitate our environment, social systems and biodiversity. Governments and society have an important role to play but they cannot do this on their own. We must find ways to actively engage the finance sector.
Transcript of a podcast interview with Ariel Babcock, formerly head of Research at FCLT Global : Published by EY
One of the issues we find frustrating about the “are financial markets short termist” debate, especially as it relates to sustainability, is how quickly it can move from …here is some evidence of short termism, through to …, and this short termism is what is causing damage to the environment, climate and stakeholders. While there is some evidence that financial short termism is both real and probably increasing, the research suggests that its linkage to sustainability is much less certain. And so what we liked about what Ariel discussed in the interview, once you got past the slightly clickbait title (what is market short-termism’s perceived impact on ESG investments?) was the focus on the financial and economic advantages of having a long term focus when making investment decisions.