Short-termism is the excessive focus of decision-makers on short-term goals at the expense of longer-term objectives. Short-termism often has negative consequences: recent research confirms that corporate executives would delay or sacrifice projects creating durable value in order not to miss short-term earnings targets. Immediate gains provide a strong incentive to executives to postpone or cancel long-term capital expenditure.
As a matter of fact, in spite of a rebound in investments started in 2017, data show a multi-year trend of deterioration of capital expenditures as a portion of total assets among European companies.
Thinking in the short-term concerns me not only because I am an insurance professional used to estimate risks over a long timeframe, but also because of the chronic gap of long-term investments in Europe. According to the European Parliament, the infrastructure investments in the European Union have been decreasing significantly since 2009, and there is a substantial gap in research and development expenditures. More specifically, the gap between the EU and the US in terms of R&D intensity has been widening, while that between the EU and China has been narrowing, showing China’s rapid catch-up.
One sector of the European economy that is dramatically impacted by short-termism is manufacturing, which is key to our continent’s wealth and accounts for almost 70% of Europe’s exports. In virtually all manufacturing industries where the EU plays a relevant role, there is still a remarkable R&D gap. The most recent data show a worsening trend: Europe’s share of the world’s total manufacturing exports and value-added is shrinking, partly due to the rise of emerging markets. I believe this should serve as a wake-up call: upgrading Europe’s manufacturing through substantial new investments is vital.
Broadly speaking, the effects of short-termism are a cause for concern, but its impact on Europe is more deeply entrenched given the continent’s investment backlog. The European institutions have been tackling this problem over the past years, conscious of the fact that it is only by looking at the long term that the Union can accomplish its agenda based on innovation, a lower environmental impact and a progress aimed at reducing social inequalities and benefitting all. Hopefully, the outcome of the recent elections will provide further impulse to pursue this agenda. Measures already taken by the EU included the 2017 rule requiring insurers and pension funds to provide greater disclosure on their investment strategies, the so-called European long-term investment funds, and the abolition of mandatory quarterly financial reports.
It is key that businesses support the European institutions’ efforts to curtail the excessive focus on immediate gains and to encourage far-sighted strategies. Insurers, as Europe’s largest institutional investors with €10 trillion of assets under management, should spearhead these efforts.
In my opinion, businesses in general, and insurers in particular, can take action in three different ways.
1. They can prioritize the allocation of profits and assets into opportunities that create sustainable, long-term value while pursuing the right balance between re-investments and short-term obligations, such as shareholders’ remuneration and liabilities’ payment. Institutional investors, for example, can favor the long-term growth of the real economy by diversifying their portfolio towards infrastructure and private investment tools, such as private equity and private placements that cater to small- and medium-sized enterprises.
2. Businesses can embed ESG (Environmental, Social and Governance) factors in their strategies, processes and value propositions. By doing so, they are obliged to take into account their impact on the well-being of all stakeholders, their role in the society and their interactions, thereby developing a purpose, a vision and, ultimately, sustainability. This approach must be reflected in initiatives for the community and in the empowerment of human resources through continuous training and an inclusive and meritocratic culture. Young talents increasingly choose their employer on the basis of sustainability factors rather than economic ones.
3. Businesses can show their long-term focus and influence external stakeholders by providing adequate and regular disclosure on their long-term strategies, vision and sustainability initiatives as part of their financial reporting.
Looking at the bigger picture in the way we invest our resources, impact the environment and society, manage our governance and communicate to our stakeholders is essential and urgent. Especially in Europe, where long-term investments are critical to foster smart, sustainable and inclusive growth.