TRAGEDY OF THE HORIZON


Exploring and addressing the short-term focus of capital markets to secure a more sustainable allocation of capital for the long-term

A 2° Investing Initiative Project

ABOUT THE PROJECT

In the course of its work on climate-related risks of the finance sector, 2° Investing Initiative faces the question related to what Mark Carney, the governor of the Bank of England called the 'tragedy of the horizon:' risks that are material for a physical asset (e.g. power plant) or a company (e.g. electric utility) are not necessarily material for their investors and not necessarily priced in by financial analysts. As a response, we have initiated the 'Tragedy of the Horizon' research project. The objectives of the project are threefold:

1) Informing the debate by quantifying time horizons across the investment chain;

2) Identifying the unintended consequences of risk management practices focused on the short-term;

3) Developing responses in partnership with key stakeholder groups such as investors and financial policymakers

THE THREE STAGES

INFORM THE DEBATE

Quantify the embedded time horizons of capital markets across the investment chain.

IDENTIFY THE CONSEQUENCES

Assess the implications of artificial 'short-termism' for productive capital allocation for the long-term.

DEVELOP RESPONSES

Address the problem of artificial 'short-termism' and overcome the tragedy of the horizon.

CONTEXT

Change is inevitable, but predicting the precise nature and timing of change can be a challenge. From an investor's perspective, change represents risks and opportunities to be managed. While uncertainty about the future makes it difficult to forecast disruptive changes, some may be anticipated and managed through scenario development and advanced financial analysis.

In practice, the transmission of signals is often far from perfect, suffering from market failures or behavioral biases too narrowly focused on the short-term. Measuring this problem and developing solutions to it is the core focus of the 'Tragedy of the Horizon' project.

THE CLIMATE CHANGE EXAMPLE

Climate change is an important case study for the failure of long-term risk integration given short-term frameworks. Its resulting physical changes, policy responses and technological forces will disrupt the infrastructure powering today's global economy, dramatically altering the earnings potential of many sectors.

Short-term horizons that fail to capture full extent of probable long-term risks like the energy transition, could amount to devastating losses for investors with long-term liabilities and society more broadly.

THE TEAM

Stanislas Dupré

Founder & Global Director

(2° Investing Initiative)

Mona Naqvi

Program Manager (Main Contact)

(2° Investing Initiative)

Brendan Burke

Analyst

(2° Investing Initiative)

Stephane Voisin

Senior Advisor

(External)

Tricia Jamison

Analyst

(2° Investing Initiative)

INDUSTRY ENGAGEMENT

The 2° Investing Initiative would like to engage with the investment community for conducting preliminary research, mobilizing discussion and kick starting conversations on topics related to responsible and long-term investing. If you would like get involved, please contact Brendan Burke at brendan@2degrees-investing.org

RESEARCH PAPERS

Tragedy of the Horizons Project Briefing Note
Study of Financial Analyst Time Horizons
Study of Equity Portfolio Turnover
Recommendations of Time Horizon-related Metrics
Study of Corporate Decision-making and Disclosure

Forthcoming

Study of Strategic Asset Allocation

Forthcoming

NEWS/PRESS


December 9th, 2015

February 23rd, 2017