‘Tragedy of the Horizon’ project set to launch backed by the 2° Investing Initiative and Generation Foundation

Initiative takes its cue from remarks from Bank of England Governor

The Generation Foundation, 2° Investing Initiative, Mercer, Morgan Stanley and S&P Global Ratings are to co-launch two reports later this month exploring short-termism in finance under a new project called the “Tragedy of the Horizon”. It has a website here.

The new project, a partnership between the 2° Investing Initiative and Al Gore and David Blood’s Generation Foundation, derives its name from Bank of England Governor Mark Carney’s seminal speech at Lloyd’s of London in September 2015.

The initiative aims to explore the potential of misallocation of capital over the long-term due to the inability of the finance sector to capture long-term risks with short-term risk-assessment frameworks.

The first report, entitled All Swans Are Black in the Dark, will look at how short-term focus of financial analysis does not shed light on long term risks. The second report is called The Long & Winding Road and will explore how long-only equity managers turn over their portfolios every 1.7 years. The launches will also involve the Bank of England and UBS Asset Management.

The project will last three years and Daniela Saltzman, director of the Generation Foundation, has joined the board of directors of the 2° Investing Initiative, the Paris-based think tank that is also currently working on an ISO standard (14097) on investor reporting.

Its stated mission is to inform the debate around short-termism, identify the consequences of short-termism and develop responses to tackle short-termism.

The project highlights climate change as an important case study for the failure of long-term risk integration given short-term frameworks.Commenting on the initiative Blood, Senior Partner of Generation Investment Management, says: “We believe the transition to a low carbon economy will be the most significant event in economic history and prudent investors should consider allocating capital accordingly. In addition, the investor community should consider long-term sustainability factors in the risk and return profile of all assets because it can enhance results.

“Assessing carbon policy risks for the finance sector is now on the agenda of the G20. We intend to work on this issue with rating agencies and investors, with a view to addressing short-termism in investment processes and incentive systems.” The report launches will take place in New York and London respectively.

Carney’s ‘tragedy of the horizon’ comments put climate change firmly on the central banking agenda and led to the formation of the Task Force on Climate-related Financial Disclosure.

Just yesterday, for example, European Central Bank Executive Board Member Benoît Cœuré – in a speech on ‘sustainable globalisation’ – praised the work of the TCFD.

“In line with the notion that markets can only allocate resources efficiently if risks are adequately priced,” Cœuré said, “this initiative aims to reduce information asymmetries stemming from financial exposures related to climate change.

And in Australia today, the Australian Prudential Regulation Authority (ARPA) has made made a major speech about climate change (see separate story).