DP13175 Investing for Long-Term Value Creation

Author(s): Dirk Schoenmaker, Willem Schramade
Publication Date: September 2018
Keyword(s): Active investment, adaptive markets hypothesis, engagement, ESG factors, fundamental analysis
JEL(s): G11, G12, G14, Q01
Programme Areas: Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=13175

In the transition to a sustainable economy, companies are increasingly adopting the goal of long-term value creation, which integrates financial, social and environmental value. However, investors struggle to invest for long-term value and perform the social function of finance. Traditional investment approaches, based on the neo-classical paradigm of efficient markets and portfolio theory, only capture financial value in their financial risk and return space. Attempts at ESG integration are typically too shallow to overcome this problem. In this paper, we examine the set of issues that make this problem so stubborn and we outline the contours of an alternative paradigm that is better able to pursue long-term value creation. Its elements include short investment chains, active management that assesses companies' transition preparedness, concentrated portfolios, and deep engagement.