A key challenge to assessing long-term and climate-related risks involves what Mark Carney, the Governor of the Bank of England, called “the tragedy of the horizon”. Long-term liabilities and assets face a ‘valley of death’ in terms of the time horizons underlying capital allocation decisions in financial markets. As a response, we have initiated the ‘Tragedy of the Horizon’ research program to quantify time horizons in the investment chain and elevate long-term risk assessments in financial markets.
Key publication: Overcoming Barriers to Long-term Risk-assessment And The Tragedy Of The Horizon. This document comprises the ‘enhanced’ minutes of the informal working group that took place during the Piana seminar in September 2016. It includes background material on the topic, information on the actions initiated by 2dii after the seminar, and a description of the suggested follow-ups. The paper was drafted as part of a working group of participants from institutions such as the German Financial Supervisory Authority and the Bank of England.
Key publication: The Long-term Risk Signal Valley of Death – Exploring the Tragedy of the Horizon, 2dii/Generation Foundation, November 2016. This short paper describes the time horizon mismatch across the entire investment chain. The key conclusion is that long term risks are financially material on both ends of the investment chain: for long term physical assets (e.g. power plants) and long asset owners. However, financial intermediaries (banks, asset managers, analysts, etc.) have much shorter time horizons, creating a mismatch of time frames regarding the financial materiality of risk.
Key events: Exploring the Tragedy of the Horizon events in London, Paris, Corsica, and New York. Industry events included five workshops with the equity research and credit ratings industry convening over 100 participants from 27 firms, two conferences on time horizons in financial analysis featuring senior attendees from across the investment chain, and the aforementioned Piana seminar with investment leaders and regulators.
All publications from the Tragedy of the Horizon project can be found here.