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In Practice

More Than 110 Investors Discuss How They Plan for the Unexpected

Our economy, society and planet are facing many long-term systemic risks. Institutional investors must respond to challenges such as climate change and technological evolution and plan for the unexpected.

Rather than wait for these trends to become emergencies, investors who begin to tackle them now can start to mitigate the risks they pose to their portfolios and explore ways to capture opportunities that deliver long-term returns.

As a bonus — for both their beneficiaries and portfolios — adopting these investment practices should help build a more resilient economy that considers the future needs of the environment and society in tandem.

While it sounds straightforward, there is a significant obstacle: Many asset owners are not aware of how they compare to peers with respect to integrating the trends. This is where investors who wish to progress from “developing” to “advanced” require a benchmarking framework to identify gaps and areas for improvement.

For many asset owners, the willingness to change and advance is there — but the best practices of advanced investors are not obvious, and measurement tools are limited.

Investors Know There Are Issues to Tackle — But How?

Over the past two years, the World Economic Forum’s research, in collaboration with Mercer, identified six critical risks that sovereign wealth funds, pension plans, endowments, foundations and insurers are most concerned about over the long-term.

In our 2020 survey of more than 30 asset owners, — representing over $3.4 trillion in total assets — the top three trends for investors were climate change, low and negative interest rates and technological evolution.

Amid the pandemic, many governments and businesses across the globe have made commitments to rebuild the economy in a sustainable way by addressing and adapting to climate-change risks.

Meanwhile, the pandemic has propelled central banks and governments to act together to promote economic stability resulting in expectations of continued low, or even negative, real long-term interest rates.

Our research shows that investors are also concerned about water security, geopolitics and demographic shifts, specifically ageing population growth in Africa and South Asia.. If not well managed, these trends will compound the resulting instability globally, as we see more inequality, populism, protectionism, threats to free trade and natural catastrophes. Investors know there are issues to tackle — the challenge is how to do it?

No Single Measurement for Investors

To mitigate the major risks that investors face from these systemic trends, institutional investors need to scrutinize, adapt and protect their portfolios, as well as capture opportunities to pursue attractive risk-adjusted returns. Yet, our research shows that many institutional investors have made only some or limited progress on most of these systemic trends.

Many investors also lack self-awareness of where they are in their vision, governance and implementation journeys, believing they are a lot more advanced than they really are — especially compared to peers.

For example, many believed they were making great progress on tackling climate change risks because they had a responsible investment policy. Yet often the policy was not specific enough from an investment or metrics-tracking perspective to enable implementation, and remuneration was not aligned with the policy’s goals.

As a result, many investment teams were not motivated to evolve their sourcing process or feel accountable to update the policy to make it more actionable.

Advanced asset owners, however, have put in the effort required to integrate the global systemic trends into their strategic decision-making processes, adapting their vision, governance and implementation practices to account for goals, beliefs and stakeholders’ feedback.

From a top-down perspective, senior leadership at advanced asset owners have generally evolved their investment and governance policies to successfully integrate the trends. Bottom-up, advanced asset owners have investment teams that understand the systemic trends and possess the appropriate guidance, incentives and resources to identify and invest into relevant opportunities.

After conducting more than 180 interviews with members of the investment community over the past ten months, it became clear there was no single way to systematically and comparatively measure how investors are progressing on ESG and other metrics. So we created solutions.

Three Ways to Become an Advanced Investor

  1. Measure progress

This framework enables investors to measure progress on the key thematic trends identified in our research and see how they are progressing relative to peers.

Investors can use the framework and case studies to ask themselves: “Are we in development mode in addressing these systemic trends? What can we do to be more like the investors that are leading the way?”

Self-assessment will enable investors to be more proactive in addressing these trends, and, importantly, have visibility into areas in which they can amend their approaches to align with best practices and be in a better position to plan for the unexpected.

Any type of asset owner can use this framework. Even for smaller investors, the practical steps outlined are still relevant.

Source: World Economic Forum

  1. Learn from advanced peers

We identified six traits among advanced asset owners:

  • Diversity of thought: Cognitive diversity that draws on varied experiences and specialized expertise to access insightful perspectives
  • Accurate self-assessment: An ability and willingness to draw from internal and external stakeholders to understand and address organizational shortcomings
  • Commitment to strategic vision: A shared belief that action today on factors that affect the portfolio over the long term will result in enhanced risk-adjusted returns
  • Commitment to transparency: Clear communication to stakeholders from the board and senior leadership regarding beliefs, vision and objectives so that stakeholders align and contribute towards goal fulfilment
  • Culture of innovation: Development of new expertise, questioning of existing norms and exploration of emerging investment themes and processes
  • Willingness to collaborate: Commitment to share best practices with peers and stakeholders so that the industry evolves more quickly, positively affecting regulations and policies
  1. In the context of climate change, engage

For climate change, an emerging trend among advanced investors is engagement over negative screening and divestment. This means not completely divesting from certain sectors, such as fossil fuels, but instead pulling out of certain companies that are not taking serious actions to address the energy transition.

But one investor’s actions alone will not change an entire sector. As a CIO of a large pension fund told us, “What good is a net zero portfolio when the world burns around you? ”By taking a selective approach to divestment, the investment community can effectively reward the companies that are doing the right thing. Exposures to such companies should also benefit long-term investors.

Beyond engagement, asset owners are addressing the trends through public and private investments. For instance, sustainable agriculture and renewable energy infrastructure to address climate change or robotics ETFs and cybersecurity funds to gain exposure to technological evolution. The asset owner survey identifies which products investors are considering, such as blue bonds and investments into women- and minority-owned organizations.

Source: World Economic Forum

Define the Destination

For investors to successfully respond to the long-term, global systemic risks facing the economy, society and planet, our framework can be a helpful resource to assess, plan and empower.

Having systematic plans in place to address these complex trends will enable investors to position themselves to capture opportunities as well as mitigate major risks. Accurate self-assessment and peer collaboration are crucial components of the journey. We believe that all asset owners with a culture of innovation, diversity of thought and a commitment to a strategic vision and transparency have the ability to become advanced in addressing the trends.

This piece was originally published in the World Economic Forum.

Ashley Knight

Project Fellow of Future of Investing at World Economic Forum

Ashley Knight is a project fellow of the future of investing at World Economic Forum LLC. She is currently representing Mercer as a fellow in New York City. At Mercer, she was most recently responsible for North America’s private debt business and a member of the Sustainable Opportunities Investment Committee.

Fiona Dunsire

Wealth Leader of Growth Markets at Mercer

Fiona Dunsire is a wealth leader of growth markets at Mercer. She is responsible for developing Mercer’s business in retirement and investments across the growth markets of Asia, Middle East, Africa and Latin America.

Maha Eltobgy

Head of Shaping the Future of Investing at World Economic Forum

Maha Eltobgy is the head of shaping the future of investing and a member of the executive committee at the World Economic Forum. She is responsible for the Forum’s though leadership on long-term investing and infrastructure finance.

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