Sovereign funds urged to tackle short-termism
State investors from China to Italy to Nigeria should help tackle the global risks posed by demographics, climate change and, in particular, short-termism, urged the chairman of the International Forum of Sovereign Wealth Funds (IFSWF).
Adrian Orr, chairman of the IFSWF and chief executive of New Zealand Superannuation Fund, exhorted his fellow fund executives to address these issues while speaking at the trade body’s annual meeting, held this year in Astana, Kazakhstan. The event was attended by senior officials from the likes of Abu Dhabi Investment Authority, China Investment Corporation, Singapore-based GIC and Malaysia’s Khazanah, as well as AsianInvestor.
Global growth may seem to be relatively strong and broad-based now but government balance sheets are still stretched and asset prices are high, said Orr. There are also other broad macroeconomic challenges, which SWFs are well placed to tackle given their deep resources and ability to invest over the long term, he added.
Demographic worries
Some of biggest risks arise from demographic trends, he said, pointing to the number of elderly people continuing to swell while birth rates fall in developed countries. That is causing the global labour force to shrink as a percentage of the total population, which is making it tougher to support retirees sufficiently.
“Look at Japan now [where the imbalance is particularly stark]. That is an indicator of what will happen in other counties,” Orr said. Hence, “we need to make hay now, by saving resources".
Sovereign wealth funds have a responsibility to tell their countries’ citizens to think ahead and not focus just on current consumption and benefits, he said.
But that is becoming increasingly difficult, especially in emerging markets where the middle class is expanding fast. People’s expectations are rising when it comes to goods and services, which is leading to growing pressure to make improvements in terms of urbanisation, infrastructure and innovation, Orr noted.
Short-termist plague
Ultimately, tackling short-termism is key, he said. “[Short-termism] is the plague. It creates issues from climate change to poor governance to corruption.”
Orr cited research suggesting short-term strategies and behaviour had become entrenched in today’s markets. He pointed to a 2014 survey conducted by McKinsey that found senior corporate executives were seeing increased short-term pressure on financial performance—despite their belief that a long-term approach is key to a company's performance.
“That short-termism has become a problem for the global financial system,” he said, meaning it is more important than ever for sovereign investors to set an example as long-term allocators.
Orr also voiced support for globalisation and free trade, in a clear rebuke of US president Donald Trump’s protectionist leanings, and criticised the US’s withdrawal from the Paris climate change accord.
“On climate change, we have seen two steps forward from most of the world and one big step back from the US,” he said.
Trump said in May he was pulling the US out of the 2015 global agreement to fight global warming, saying it would harm the American economy and cost jobs. But the president has come under increasing pressure for his stance following the devastation caused by Hurricane Harvey last month and Hurricane Irma over the past few days.
Orr is not alone in his views. There was a notable focus on environmental, social and governance factors among executives AsianInvestor spoke to at the event from funds such as Samruk-Kazyna (one of the two Kazakh SWFs), Morocco’s Ithmar Capital and Australia’s Future Fund.