Chapter 7: Investing for long term value creation

- Long term value creation (LTVC) integrates financial, social, and environmental value.
- Traditional Investment approach builds on neoclassical paradigm of efficient market and
portfolio theory.
o Efficient market hypothesis (EMH) assumes that all information in incorporated in
stock prices , suggesting passive investment.
o Portfolio theory considers risk & return concept . Does not include social &
environmental aspect in equation.
o Excessive diversification creates free-rider problem with regards to monitoring of
corporate management
o Adaptive Market Hypothesis (AMH) – identifies the limitations to market efficiency
and need for market participants to adapt to new information
- Use active investment approach (to keep track of ESG updates) combines with fundamental
analysis. Understand company’s social and environmental value along with financial value.

6 conditions for investing in LTVC:

- Long investment horizon

- Active management in concentrated portfolios
- Effective engagement with companies
- Performance analysis of value added in real economy
- Long term alignment of the mandates of asset owners and asset managers
- Keeping the investment chain short