Incentive Mechanisms for Advancing Long-Termism and Sustainability Along the Supply Chain

This report identifies challenges and actions for asset managers, asset owners, commercial banks, non-financial companies, and regulators to embrace "long-termism", which is referred here to long-term value creation with a time horizon over one year that produces financial profits and measurable socio-environmental benefits aligned with the SDGs. The methodology involves a combination of desk research and expert interviews seeking data and best practices to make the business case for adopting long-termism. Value investing strategies can better manage climate, social, and government risk in the long-run, and are expected to yield better returns five to seven years from now.

Asset owners are the central actor in the financial ecosystem and have the capacity and mechanism to engage in “active ownership” other than investing in sustainability practices. Doing so would also encourage asset managers to follow the same path. Research supports that asset managers implementing environmental, social, and governance sensitive investment strategies create short- and long-term shareholder value. Fiduciary responsibilities and compensation schemes can be re-aligned to capture long-term value creation. Banks' ability to invest long-term is highly constrained by maturity mismatch problems, liquidity risk, interest risk, and regulations. The key to balancing stability and access to finance is targeted policies for qualified infrastructure and sustainable investment. An increasing number of companies are implementing sustainable strategies; though, many still consider sustainability a passive strategy to meet regulators' and investors' requirements. The tangibility of its benefits needs to be clear.

To that end, targeted regulators’ initiatives with global reach, designed to establish links between financial materiality and progress towards the SDGs are necessary to incentivize non-financial companies to adopt long-termism. Long-termism in developing countries has been embedded in equity investment made by international organizations aiming to achieve impact. Private impact investors would gain long-term risk-adjusted returns from noticing that International Finance Corporation’s portfolio has outperformed the S&P 500 by 15 percent.