Trendsetters transformational investment practices of advanced investors 

Mature businessman leading project meeting in office conference room

08 February 2023

Mercer and World Economic Forum

Global systemic risks could significantly influence investor returns and long-term objectives in both positive and negative ways. Asset owners such as sovereign wealth funds, pension funds, endowments, foundations and insurers should to understand what these risks are, along with the opportunities they may also bring, and implement an efficient strategy to integrate them into their portfolios. Due to the fast pace at which trend-linked risks and opportunities arise, we believe investors need to take a disciplined approach to integrate and measure these solutions in their strategic portfolio construction processes.

In 2020, we launched the Transformational Investing – Converting Global Systemic Risks Into Sustainable Returns report, which focused on the six major risks identified as most relevant by long-term asset owners. The report featured detailed insights on each risk, along with associated case studies, acknowledging their varying importance to different asset owners based upon their specific objectives, constraints, mandate, vision, and governance structures. In partnership with the World Economic Forum, GIC and 60 global asset owners, we launched a new report that explores how asset owners are addressing these trends within their organizations.

To highlight what we found advanced asset owners were doing, we developed a framework for addressing global systemic trends that investors can use to benchmark their progress against their peers. The framework focuses on vision, governance and implementation approaches. Investors should take a disciplined approach to integrate and measure trend-linked products in their strategic portfolio construction processes.

Meaningful data should be a vital tool in helping investors establish, implement and track strategies that seek to capture opportunities and help mitigate risks.
It is only when we come together with a long-term perspective, share best ideas, and co-create better solutions, that we as a global investment community can succeed – and succeed sustainably – in the years to come

Generating sustainable returns from systemic risks

After conducting more than 180 interviews with investment community members over the past two years1 we have defined a five-step governance process asset owners can use to address these critical global systemic trends. Three vital organizational processes overlay the steps: vision, governance, and implementation.

Benchmarking yourself against other investors

While some asset owners are mindful of their progress in integrating these trends into their strategies and portfolios, many are less aware of how they compare to peers. Without a benchmark, asset owners cannot accurately assess their practices relative to industry-leading approaches.

There are various ways “developing” versus “advanced” asset owners approach the global systemic trends. “Advanced” generally describes asset owners that have already invested substantial time and resources to develop and maintain a transformational investment approach that addresses a global trend into systemic implementation. “Developing” refers to asset owners that are just beginning to address these global trends or that do not yet have a robust and systemic approach. The report includes several practical case studies.

Highlighted below are the key factors across an asset owner’s vision, governance and implementation approaches that differentiate an investor’s progress. By referencing these subcomponents, asset owners can self-assess their level of advancement on a particular trend.

Take climate action as an example: Many asset owners are still at the “developing” stage. Advancing from this level typically requires, at a minimum, the vision and supporting mission statements and objectives to capture the relevance of climate considerations. The effort needed to achieve this is multifaceted and organizationally intensive as it involves reflection on mission, beliefs and values, and demands buy-in from stakeholders and leadership. It also requires a full assessment of the challenge of how to integrate climate considerations into fiduciary duties and investment strategies.

Solutions that help address the trends

Investors are accessing products that address the trends in a range of ways. For example, they are investing in low carbon indices, sustainable protein and green property to address climate change, and cybersecurity and robotic funds to target technological evolution. Product evolution has accelerated as asset owners engage managers to align with the Sustainable Development Goals – and this trend continues. Download the Investment Products Related to the Trends table to help you identify the potential opportunities and strategies based on asset type and trend.
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