After a year of reacting to the many risks brought upon by COVID-19, institutional investors need to adapt in an effort to protect their portfolios and capture opportunities for future attractive, risk-adjusted returns.
Climate change, low and negative interest rates, technological evolution, demographic shifts, geopolitics and water security are leading risks for investors. For example, in relation to climate change, investors need to consider the potential adverse impact on assets in their portfolios as a result of the physical risks associated with climate change. These include the risk of stranded assets as a result of the transition to a low carbon economy. Additionally, technological evolution provides many potentially attractive investment opportunities, but investors need to have the organisational culture and resources to take advantage of them.
While investors know there are many issues to tackle across all of these trends, many are challenged by how to go about it.
To try to mitigate the major risks that investors face from these systemic trends, institutional investors need to scrutinize, adapt and adjust their portfolios and capture potential opportunities to pursue attractive risk-adjusted returns. Yet, Mercer research shows that many institutional investors have made only some or limited progress on most of these trends.
As a starting point, it is vital for investors to have visibility into how they can amend their approaches so they can begin to align with what they believe are best practices and be in a better position to plan for the unexpected
A framework for addressing global systemic trends can assist investors in measuring their own progress and benchmark it to their peers. Investors can use a framework, like the one below, alongside case studies, to help them determine: “Are we still in development mode in addressing these systemic trends? What can we do to be more like the investors that are leading the To try to mitigate the major risks that investors face from these systemic trends, institutional investors need to scrutinize, adapt and adjust their portfolios and capture potential opportunities to pursue attractive risk-adjusted returns. way?”
The answers to such questions help asset owners understand and address gaps in their processes for addressing these systemic trends. Asset owners who are advanced in this process often have several traits in common, including diversity of thought, commitment to strategic vision and a willingness to collaborate. They also integrate global systemic trends into their strategic decision-making processes — a complex but worthwhile effort.
Diversity of thought: cognitive diversity that draws on varied experiences and specialized expertise to access insightful perspectives
An organization’s size is not necessarily a critical factor for becoming advanced. Rather, part of an organization’s progress depends on senior leadership agreeing on how systemic risks affect its mission, beliefs and ability to achieve investment objectives. For smaller investors, who use a consultant in place of in-house expertise for advice and implementation, the practical steps are still relevant.
Rather than wait for systemic trends to negatively impact risk-adjusted investment returns, investors who begin now can both get ahead in their efforts to mitigate the risks to their portfolios and explore ways to identify opportunities that could deliver long-term returns. Advanced investors also have the potential to help build a more resilient economy that considers the future needs of all stakeholders.
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