Working Paper: CEPR ID: DP13175
Authors: Dirk Schoenmaker; Willem Schramade
Abstract: In the transition to a sustainable economy, companies are increasingly adopting the goal of long-term value creation, which integrates financial, social and environmental value. However, investors struggle to invest for long-term value and perform the social function of finance. Traditional investment approaches, based on the neo-classical paradigm of efficient markets and portfolio theory, only capture financial value in their financial risk and return space. Attempts at ESG integration are typically too shallow to overcome this problem. In this paper, we examine the set of issues that make this problem so stubborn and we outline the contours of an alternative paradigm that is better able to pursue long-term value creation. Its elements include short investment chains, active management that assesses companies’ transition preparedness, concentrated portfolios, and deep engagement.
Keywords: Active Investment; Fundamental Analysis; Engagement; ESG Factors; Adaptive Markets Hypothesis
JEL Codes: G11; G12; G14; Q01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| companies performing well on material ESG issues (G38) | superior financial performance (G29) |
| traditional investment approaches (G11) | narrow focus on financial returns (G39) |
| narrow focus on financial returns (G39) | hinders long-term value creation (D25) |
| reliance on market metrics (G10) | failure to achieve inclusive capitalism (P12) |
| complexity of investment chains (E22) | distorts incentives (H31) |
| distorts incentives (H31) | short-term focus (G31) |
| short-term focus (G31) | negatively impacts long-term value creation (G32) |
| alternative investment paradigm (G11) | better assessment of transition preparedness (P27) |
| better assessment of transition preparedness (P27) | enhance long-term value creation (D25) |