Getting Back on Track It was such a privilege to co-author a long-ish essay with my dear friend Robert Brown for Institutional Investor on how to get the sustainable investing space back on track (link in comments - no subscription necessary). We lay out what we think went wrong, where focus should be placed and a few practical steps to get there. Our simple message: sustainable investing got side-tracked by ratings/disclosures/marketing. Instead, the field should "simply" focus on evaluating the long-term financial prospects of a business - i.e. its terminal value. The terminal value of a company is 70-80% of its enterprise value but currently takes up less than 2% of most investors' time and thinking. Focusing on the drivers of the terminal value of a business (long-term growth rates and discount rates) can clarify what this whole project is about. We end with six ways to get there - including better studying human capital, macro, policy and technology. All of which are topics we focus on deeply in my team at Jefferies. We hope you find it useful and of course we would love all comments and reactions!
I totally agree - "sustainability" issues are just a subset of issues in the real world that we can represent structurally in cash flow models + return models. But this doesn't only impact terminal value, it can have real short term effects as well. We just need the right analytics to get granular about the near term.
It was a true pleasure writing this with you.
Totally agree that sustainability should be about solid financial discipline, not just virtue signaling. In reality, without changes in incentives and governance, all the talk about long-term value stays just that—talk. The industry’s deep-rooted short-termism, driven by performance benchmarks and rigid mandates, doesn’t help either. On top of that, the quality and availability of reliable data—especially things like LCA or Scope 3 emissions—make it tough for portfolio managers to put theory into practice. Data gaps are still huge in private markets, and even in listed equities, things are only marginally better
And only today in the Impact Finance class we learnt how different social and environmental changes and negatives can affect growth rates and discount factors, driving down the terminal value.
Aniket Shah, PhD ☀️Human capital, makro , regulation, technology and some more yes. These are key
Managing Director @ Jefferies | Adjunct Professor @ Columbia
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