To mitigate risks from systemic trends institutional investors need to scrutinise, adapt, and protect their portfolios along with capturing opportunities to pursue attractive risk-adjusted returns, according to a report.
A report by the World Economic Forum, in collaboration with Mercer, found institutional investors had made only some or limited progress on most of the systemic trends they were most concerned about over the long term.
The top trends were climate change, low and negative interest rates, technological evolution, followed by water security, geopolitics, and demographic shifts.
The report said investors also lacked self-awareness of where they were in their vision, governance, and implementation journeys, believing they were a lot more advanced than they really were, especially compared to peers.
It said advanced asset owners integrated global systemic trends into their strategic decision-making processes, adapted 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,” it said.
“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.”
The report identified six traits among advanced asset owners which were:
- Diversity of thought;
- Accurate self-assessment;
- Commitment to strategic vision;
- Commitment to transparency;
- Culture of innovation; and
- Willingness to collaborate.
Engagement was an emerging trend for advanced investors tackling climate change 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,” the report said.
“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.”