A closed defined-benefit book has a liability duration somewhere between fifteen and twenty-five years. The manager holding assets against it is judged, in practice, on one. The committee that hires and fires that manager reads a pack every quarter.
Nobody in that chain is being reckless. Each link is behaving rationally given how it is measured. The mismatch between the horizon of the promise and the horizon of the scoreboard is what the literature calls short-termism, and it has been diagnosed, regulated against, and partly fixed. It persists anyway.
That matters more for natural assets than for anything else a long book can own, because a living system is the one position whose clock cannot be renegotiated at the next valuation date.
what short-termism actually is
Short-termism is the tendency of investment decisions to optimize near-term measured performance over longer-term fundamental value, driven by the incentives and reporting cadence of the chain between a saver and a company — not by the impatience of any individual in it.
The canonical anatomy comes from John Kay's 2012 review of UK equity markets for the Department for Business, Innovation and Skills. Its conclusion is worth quoting because it locates the problem precisely: short-termism is a real problem in equity markets, "and the principal causes are the decline of trust and the misalignment of incentives throughout the equity investment chain."
The chain is the mechanism. A saver's money passes through a trustee board, a consultant, an asset manager, sometimes a sub-advisor, into a company run by directors on their own incentive cycle. Every link adds an agent whose personal measurement window is shorter than the saver's actual horizon. Kay's finding was that trading relationships had displaced stewardship relationships along that chain — that the default response to a disappointing company became exit rather than engagement.
His seventeen recommendations follow from that diagnosis rather than from a complaint about speed. They cluster into four moves: shorten and simplify the chain, apply fiduciary standards to every relationship in it rather than only the first, pay people over the horizon they are supposedly managing, and make stewardship the norm instead of the exception. Two are unusually concrete. Directors' long-term incentives should be paid only in company shares held until after the executive has retired. Asset managers should be paid through an interest in the fund itself, held until they are no longer responsible for it.
the recommendation that passed, and what it proved
You might reasonably assume this was solved by policy. One of Kay's recommendations was implemented close to verbatim.
Recommendation 11 asked for mandatory quarterly reporting to be scrapped. The Financial Conduct Authority removed the requirement to publish interim management statements with effect from 7 November 2014, a year ahead of the pan-European implementation date, at the Treasury's request. Issuers stayed free to publish quarterly if they wanted to, and a great many did.
Short-termism did not end. It did not end because the quarterly statement was never the cause. It was the most visible artifact of an incentive chain that was left largely intact. Remove the mandatory disclosure and the career-risk arithmetic underneath it is unchanged: the person who underperforms a peer group for six quarters while waiting for a thesis to mature is often gone before it does.
That is the useful lesson for anyone designing a new long-dated claim. Measurement cadence is not a disclosure setting. It is the product.
the five pressures that shorten a long book
Long liabilities do not produce long behavior on their own. Five specific pressures pull the other way, and they operate on institutions that genuinely intend to invest for decades.
| pressure | mechanism | what it does to behavior |
|---|---|---|
| funding and accounting rules | liabilities marked to market; surplus volatility is the reported number | forces hedging, and can force selling into stress |
| career and relative performance | managers assessed against a peer universe over one year | conviction positions get cut before they resolve |
| open-ended fund liquidity | daily dealing wrapped around slow assets | the liquidity promise, not the asset, sets the holding period |
| benchmark herding | risk defined as tracking error against an index | crowds into liquid exposures; starves idiosyncratic long claims |
| thin ultra-long supply | not enough 30-to-50-year-plus physical paper to go around | duration gets synthesized with leverage instead of bought |
Read the table as a design brief rather than a complaint. Each row is a constraint any instrument entering an institutional portfolio has to survive — including ours.
one paragraph on 2022, because it is the standing caution
The fifth row has a famous consequence. When physical long paper is scarce, desks manufacture duration with interest-rate swaps and gilt repo. After the UK fiscal statement of 23 September 2022, long gilt yields spiked, leveraged liability-driven investment hedges faced collateral calls, and schemes sold gilts to raise cash — which pushed yields higher and triggered more calls. The Bank of England intervened on 28 September with a temporary long-dated gilt purchase facility. The episode was not a failure of long-horizon thinking; it was a failure of liquidity design inside a long-horizon hedge, and the lesson is narrow and durable: when your duration comes from leverage, stress liquidity is part of the product, not an externality. The duration mechanics, the collateral arithmetic, and where an ecological claim actually sits on the curve are worked through in match your liabilities to living systems. This post stays on the measurement problem.
the clock that will not be renegotiated
Here is the turn, and it is an operational argument rather than an ethical one.
Financial clocks are negotiable. A term can be extended, a covenant waived, a hedge rolled, a mark smoothed by a valuation policy. Ecological clocks are not. Hydrologic function in a restored reach can respond within a few seasons. Soil structure, riparian recovery, and stand composition run decades. Structural maturity in a temperate forest runs past a century. A functioning watershed has no maturity date at all — it keeps producing water regulation, flood attenuation, and habitat until something breaks it.
Two consequences follow, and both are invisible to a quarterly frame.
First, capital cannot compress biological time. Doubling the budget does not halve the recovery period for an aquifer or a peat body. Money buys the start of the clock, not its speed.
Second, protection is not linear in its funding. A stewardship program cut in year three of a twelve-year hydrologic response does not deliver a quarter of a functioning wetland. It usually delivers a failed one, plus the sunk cost. Fire-adapted forest that gets two of the four planned treatment entries is not half as resilient; it is a fuel load with a partial record. The thing that makes ecological assets awkward for short measurement is not volatility. It is path dependence.
This is not an argument for illiquidity as a virtue, or for being unaccountable between valuations. A long horizon is not a reason to stop measuring. It is a reason to measure the right variable at the right interval — and for slow systems, the right variable is condition, not price.
measure condition and hold, not only mark
Kay's diagnosis transfers with uncomfortable precision to what we are building. If ensurance certificates end up marked monthly against a peer universe of crypto and alternatives, the protocol will have reproduced the exact problem he described, with faster settlement and better audit trails. Onchain does not immunize anything against a short measurement window. It just makes the window cheaper to publish.
So the reporting has to speak in two registers at once.
| what a quarterly pack reports | what a long-horizon pack also has to report |
|---|---|
| mark, return versus benchmark | measured condition of the underlying place, and its direction |
| tracking error | term remaining, and what the end state is — renewal or entrust |
| liquidity and dealing terms | holding period and turnover of the position |
| yield | who the payor is, and whether the payment stream is contracted |
The OECD's description of long-term capital as patient, productive and engaged already maps onto the protocol's own verbs: hold, deploy, tend. Patient is holding a position through a cycle. Productive is deploying into protection and restoration that produces real flows. Engaged is tending — programs, condition-responsive rates, a named steward. Short-termism in our system would look like untended holding, which is stagnation, or tended emptiness, which is extraction.
Two honest limits, stated plainly because a skeptical committee will ask. No pension can currently hold protected nature as a duration hedge; what exists sits in alternatives and real-asset sleeves, with payment schedules mostly shorter than liability duration. And the coupon on ecological protection is still substantially manufactured rather than drawn from deep contracted demand — the payor base is being built, not harvested. Anyone claiming otherwise is selling.
frequently asked questions
what is short-termism?
Short-termism is the systematic preference for near-term measured performance over long-term fundamental value. Kay's 2012 review located its causes in the decline of trust and the misalignment of incentives along the investment chain between savers and companies, rather than in the character of individual investors.
why do long-horizon investors still act short-term?
Because five pressures override the horizon: mark-to-market funding rules, one-year relative performance assessment, daily-dealing liquidity promises wrapped around slow assets, tracking error as the working definition of risk, and a thin supply of genuinely long paper that pushes desks toward leveraged synthetic duration.
did the Kay Review fix short-termism?
Partly, and instructively. Its recommendation to remove mandatory quarterly reporting was implemented — the FCA dropped the interim management statement requirement on 7 November 2014 — while the incentive and remuneration recommendations were adopted far more unevenly. Behavior followed the incentives, not the disclosure rule.
what does short-termism have to do with nature?
Natural assets have the longest and least negotiable clocks on any balance sheet, and their outcomes are path-dependent: partial funding of a multi-year restoration frequently returns nothing rather than a proportion. Short measurement intervals therefore misprice living systems more badly than they misprice anything else.
what to do next
If you manage or advise long-duration money, the practical move is small: ask what interval each position is actually being judged on, and whether that interval bears any relationship to the interval over which the position resolves. Where the answer is no, you have found either a mispricing or a future forced sale.
Then read the companion piece — long-term investing still needs a living present — which takes the same problem from the mandate side rather than the measurement side.
When you want to see what a condition-and-term claim looks like against a named place rather than in the abstract, start with eagle-river.basin, then explore the rest: agents representing place, people and purpose, the natural assets under them, and how proceeds route. The places are the thing. ensurance is how their protection gets funded.
the series
This post is the third in a series on the two longtermisms — the moral one and the fiduciary one — and the living present both of them treat as a constant.
- longtermism still needs a living present — the pillar: survival multiplied by what surviving is worth
- long-term investing still needs a living present — patient capital is a mandate; the planet it sits on is not a constant
- short-termism is why long money still acts short — you are here
- future generations inherit a living system or they inherit a story — next in this series
- a long-horizon book still needs a living clock — next in this series
For the duration and allocator questions underneath all five, the hub is who can hold nature for decades; for the giving side of the same horizon problem, start at a donor-advised fund is a parking lot.