Managing Investment Risk for the Long Term Insights on practitioner progress beyond short-term financial considerations

Institutional investors (such as sovereign wealth funds and
government pension funds) recognize that building and
stewarding wealth over long horizons requires consideration
of a broad range of risks, not all of which are easily measured.
The increasing sophistication of investors and new technologies
are slowly increasing the transparency of some of these risks.
However, the practical challenges of consistent assessment
and effective management of risks in long-horizon investment
portfolios remain significant.
In the case of public companies, public disclosure is required
for traditional financial metrics. As a result, public company
management teams focus on these metrics. And financial
markets are relatively efficient at assessing and assigning
valuations to companies and securities that reflect them. These
factors, however, are only part of the story of a company’s
sustainable franchise value. Non-traditional risks, including
those that relate to environmental, social, governance,
intellectual property, regulatory, technological, security and
demographic considerations, are far less consistently measured
or understood. Yet it is transparency on these strategic risks
that is required to build insight into long-term franchise value,
as today’s corporate activities manifest in internalized costs or
benefits, over time.
The data on these strategic risks has been improving over the
past decade but remains inconsistent, of varying quality and
patchy across industries and regions. These risks are generally
poorly reported and sometimes still ignored entirely by company
managements. As a result, they often are not priced efficiently in
financial markets.
Even in the cases where long-term investors can identify such
long-term risks, their capacity to influence the management of
those risks is limited in public markets. This results from three
common characteristics. First, ownership stakes are typically
small compared to the overall market capitalization of the
company. Second, long-term investors have found it difficult
to articulate and communicate their concerns consistently and
clearly. And third, cooperation among long-term investors to
overcome these friction costs remain constrained by regulatory
hurdles in some regions. Historically, these three factors have
contributed to inefficient outcomes.

Fuente: weforum

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