Advisors investing client assets for the long term now have another reason to invest some or all of those assets based on environmental, social and governance factors: ESG investing, by its very nature, takes a long-term approach.
“The ability to analyze and quantify the environmental and social impact at the individual portfolio level, let alone at a systemic level, requires analysis over the long timeframe,” according to a new report from Merrill Lynch Wealth Management. “This need to take a long-term view is an important distinction for impact investing.”
(Related: GMO’s Grantham: ‘We’ve Created a Toxic World’)_
The distinction stands in sharp contrast to the short-term approach that has been dominating financial markets and can erode potential long-term returns, according to the Merrill report.
It cites research, appearing in The Atlantic magazine that the average holding time for stocks fell from eight years in 1960 to eight months in 2016 and that 80% of the CFOs say they would sacrifice economic value of their firm to meet quarterly expectations. The results are high turnover in investments, which involves trading costs that can reduce gains; more share buybacks by corporations instead of investments in capital equipment or employees; and increased risks in those stocks, according to the report.
“An agricultural firm that doesn’t take into account the environmental impact of its operations is not considering the potential negative impact of climate change or the potential that consumer preferences [that] … shift to sustainably produced goods may have on it future ability to grow and sell their crops.”
A recent report from the Sustainability Accounting Standards Board (SASB), cited in the Merrill report, estimates that climate change risk affects 93% of the U.S. equity market. “By integrating ESG factors in the investment process, investors can potentially lower not only the risk they face from individual companies, but if applied broadly by the majority of investors … the market could conceivably lower the systemic risks faced by all,” according to the Merrill report.