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Measuring Long-Termism: Index Impossible

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Measuring Long-Termism: Index Impossible

Short-termism (or quarterly capitalism) is defined as companies’ fixation on managing for the short term, with decisions driven by the need to meet quarterly earnings at the cost of long-term investment. Short-termism at its worst has the potential to be problematic, as underinvestment can impede future economic growth, manifesting in low GDP growth, higher unemployment levels, and lower future investment returns for savers. In our previous paper in this two-part series, “Long-Termism Versus Short-Termism: Time for the Pendulum to Shift?”, we wrote about short-termism and how market participants are responding to this issue.

Market participants have begun to realize that one of the most effective ways to deal with short-termism is by changing the strategies and approaches of those who control the capital: the asset owners. Focusing Capital on the Long Term (FCLT) was set up in 2013 by McKinsey & Company and Canada Pension Plan Investment Board (CPPIB) in order to develop practical frameworks, metrics, and approaches for promoting longer-term behaviors in the investment and business worlds. Since then, many leading global asset owners, asset managers, and companies have joined the initiative, and together they have put forth their detailed recommendations on how the asset-owner community can adopt the principles of long-termism.

Their recommendations encourage market participants to select and construct benchmarks that are focused on long-term value creation (LTVC). Against that backdrop, S&P Dow Jones Indices and its sustainability research partner RobecoSAM worked extensively with CPPIB to create an LTVC benchmark.

The S&P LTVC Global Index was designed as a vehicle to identify the companies that embody long-termism and give long-term market participants an index that seeks to track the performance of these like-minded companies. The index also aims to engage companies on the issue of long-termism in order to motivate them to improve disclosure on their sources of LTVC.