These are risks that are material for a physical asset (e.g. power plant) or a company (e.g. electric utility) are not necessarily material for their investors and not necessarily priced in by financial analysts. As a response, we have initiated the ‘Tragedy of the Horizon’ research project.
The objectives of the project are threefold:
1) Informing the debate by quantifying time horizons across the investment chain;
2) Identifying the unintended consequences of risk management practices focused on the short-term;
3) Developing responses in partnership with key stakeholder groups such as investors and financial policymakers
Tomorrow’s markets will evolve due to a combination of trends and the collapse of unsustainable business models as advances in technology, the environment and public policies emerge. Change is inevitable, but predicting the precise nature and timing of change can be a challenge. From an investor’s perspective, change represents financial risks and opportunities to be managed. While uncertainty about the future makes it difficult to accurately forecast disruptive changes, some may be anticipated and managed through proper scenario development and more advanced financial analysis.
Given the right type of information, risk and price signals can move more effectively along the investment chain, resulting in capital allocation that is more sustainable for the long-term. In practice, the transmission of these signals is often far from perfect, skewed by unpriced externalities and suffering from market failures or behavioral biases too narrowly focused on the short-term. Measuring this problem and developing potential solutions to it is the core focus of the ‘Tragedy of the Horizon’ project.
Find out more about the project and related papers here.