Investor Group Hopes to Promote Good Governance and Long-Term Thinking With New Index
A group of global investors is hoping that convincing companies to adopt good governance standards—and avoid making decisions that provide a quick pop but don’t support long-term goals—can be a lucrative proposition.
Six large pension plans and sovereign-wealth funds are joining to create an index, called the S&P Long-Term Value Creation Global Index, that is comprised of companies that “have demonstrated the ability to manage both current and future economic and governance opportunities and risks by focusing on a long-term strategy,” stated S&P Dow Jones Indices, which is managing the index.
The S&P LTVC Global Index is designed to measure companies that have the potential to create long-term value based on sustainability criteria and financial quality. Canada Pension Plan Investment Board (CPPIB), a co-founder of the Focusing Capital on the Long Term (FCLT) initiative, worked collaboratively with S&P DJI to develop the Index.
The companies, which will start with a group of 246, must also have a sustained history of financial quality, S&P DJI noted in a release. Companies with these characteristics are more likely, it said, to maintain a competitive advantage and thereby sustain stakeholder value. If successful, it could provide a badge of merit for companies that have good governance, including good audit practices.
"Over the past few years, there has been an intensifying investor demand for a benchmark that captures companies that take a long-term approach in making business decisions," says Alex Matturri, CEO of S&P Dow Jones Indices. "The launch of the S&P LTVC Global Index is a manifestation of the long-termism concept with an independent and transparent approach. We are proud to leverage our deep indexing knowledge to facilitate awareness and education for market participants."
"We are proud of the role our investment teams played in the development of this innovative new index from S&P DJI, as part of CPPIB's ongoing work to advance longer-term behaviours in capital markets today," saysMark Wiseman, President and CEO CPPIB. "We believe this Index has the potential to act as a real catalyst to encourage a greater focus on factors that contribute to long-term value creation by both corporate management and investors, all to the ultimate benefit of individual savers and beneficiaries."
The S&P LTVC Global Index will be constructed by combining qualitative and quantitative measures into a single metric to determine the potential for long-term value addition. The Economic Dimension Scores provided by RobecoSAM are included in the qualitative assessment to gauge corporate governance effectiveness. The quantitative assessment consists of drivers of long-term investment returns – Return on Equity, Balance Sheet Accruals ratio and leverage ratio.
The Index, which was announced at the World Economic Forum in Davos, Switzerland, will be backed initially with $2 billion in investments from the group of pension funds. It may be the best chance yet at settling the debate over whether good governance really does provide better returns.