The long-term view in a short-term world

Investor focus on ESG has reached a critical moment, with recognition that a long-term strategy will be essential for any company that wants to deliver strong results over time. With ESG screening criteria and greater reporting transparency, the way that returns are measured has begun to move. This will be increasingly relevant as the pandemic subsides, when building resilience will be key. 

Companies need to bear in mind five points: 

Adapting to investor expectation 

Investors and consumers now expect detailed reporting on ESG criteria, which range from diversity policies to an assessment of climate change impact. Investors are increasingly willing to criticise companies that fail to do this. Early identification and alignment of policies and practices to key principles — such as the UN Principles for Responsible Investment and international due-diligence expectations — will be crucial to companies that want to attract and retain investment and market trust.

Long-termism and legal obligations 

Long-termism is at the heart of company legislation and guidance. In the UK, the legal duty under section 172 of the Companies Act 2006 is to promote the success of the company for the members as a whole with regard to certain statutory factors (including the likely consequences of any decision in the longterm, and the effect of operations on the community and the environment). This embodies the concept of enlightened shareholder value and has been interpreted as encouraging decision-making from a long-term perspective — with “success” interpreted as long-term value creation. This is also the approach internationally, with Japan and Singapore among those to encourage financial services institutions and companies respectively to consider long-term sustainable value. Companies must pay more than lip service to these factors. 

Short-termism, agility and strategy 

The duty to consider long-term consequences still requires short-term strategic agility. Sustainable decisions can meet the needs of the present without compromising the ability of future generations to meet their needs. In a time of rapid market change facilitated by technology and media that reward speed, companies will have a better chance of long-term survival if they can adapt quickly to challenges and take advantage of opportunities. 

Contextualising strategy 

When there is a difference between short-term actions and long-term strategy, companies can be open to challenge from all stakeholders, with listed companies in particular exposed to activist activity (increasingly focused on ESG). It is vital that companies engage with stakeholders to understand how short-term actions contribute to long-term strategy. 

Risk evaluation and management 

Sustainable growth is rooted in the longer-term view of risk identification and mitigation. Corporate liability regimes, including those of parent companies, are evolving internationally, with greater focus on de facto power and the exercise of de facto management and control. Disclosure requirements have increased in importance with the aim of creating a fairer world through better supply chain practices and ethical auditing. An early understanding of legal obligations, in the jurisdictions in which a group operates and within its sector internationally, allows companies to manage legal and reputational risk.

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