There is value in both short-term and long-term thinking. Short-term thinking allows us to focus on the task at hand, deal with immediate problems, and set priorities. Long-term thinking provides direction, drives culture, and helps us align resources toward achieving long-term objectives. The trick is finding the right balance.
Unfortunately, for many organizations there has been little to no balance. Decisions are driven by short-term targets and quarterly earnings calls. The powerful incentives associated with short-term metrics drive businesses to do whatever is necessary to make money now — while often sacrificing the organization's long-term sustainability in the process.
So, as I read BlackRock CEO Larry Fink's annual letter to CEOs, I was struck by his emphasis on the long term and, more specifically, how he brings sustainability into the conversation. Instead of making a social or moral argument, he makes one based on where CEOs pay most attention: the pocketbook. He writes:
"Will cities, for example, be able to afford their infrastructure needs as climate risk reshapes the market for municipal bonds? What will happen to the 30-year mortgage — a key building block of finance — if lenders can't estimate the impact of climate risk over such a long timeline, and if there is no viable market for flood or fire insurance in impacted areas? What happens to inflation, and in turn interest rates, if the cost of food climbs from drought and flooding? How can we model economic growth if emerging markets see their productivity decline due to extreme heat and other climate impacts?"
From Fink's perspective, taking a long-term view is linked with the needs of stakeholders. That commitment should be reflected in an organization's willingness to be transparent in how they are addressing sustainability risks. "In the absence of robust disclosures, investors, including BlackRock, will increasingly conclude that companies are not adequately managing risk," he writes.
The question, then, is where internal audit fits into this conversation. In a previous post, I discussed internal audit's opportunity. With the growing interest in environmental, social, and governance (ESG) reporting, internal audit can play a key role in aligning board expectations with those of stakeholders.
Internal auditors can begin by becoming proficient in ESG risk and knowledgeable of both the United Nations' Sustainable Development Goals and the standards presented by the Sustainability Accounting Standards Board (SASB). With this knowledge, they can ensure board members understand — without the need to dive into the politics of the issue — that how the organization addresses sustainability has a real effect on the bottom line.
To do this effectively, internal audit should emphasize the long term alongside the short term. Short-term thinking has its place and should not be discounted. That said, the trap of relying on it exclusively is that it sometimes is difficult to see the forest for the trees.
Reporting in conformance to SASB standards takes an investment in time, effort, and capital that may not seem worthwhile initially. However, if I am Coca-Cola, I need clean water to make my products. If I am Ashley Furniture, I need wood. An investment toward promoting sustainability in the short term means that such materials will be available for use 10, 20, and 50 years from now.
That's a goal any stakeholder should share. Even a modest commitment to improving ESG reporting is one that signals to them that long-term growth is the real priority, not short-term profits.
In a way, this line of thinking should only reaffirm what has always been internal audit's role. We can be a strong advocate for taking the long-term view. And, we're not alone. When the Business Roundtable recently revamped its Statement on the Purpose of the Corporation, it included "generating long-term value for shareholders, who provide the capital that allows companies to invest, grow, and innovate" as one of its five commitments.
As the conversation regarding sustainability reporting continues — and the balance shifts toward long-term — the internal audit profession should seize the opportunity to get involved early and help drive the conversation. If there is anybody capable of cutting through the noise and showing how thinking long-term can have serious financial and operational consequences, it's us.