We believe the framework recently developed through a collaborative study between the World Economic Forum (WEF) and Mercer for evaluating and incorporating global systemic risks into investment programmes provides useful insight for asset owners on addressing the risks and opportunities created by the pandemic. Drawing on the ‘World Economic Forum Global Risks Report 2020’, the new Mercer/WEF study, ‘Navigating a Pandemic-Driven Market Crisis’, highlights the most significant risks faced by economies today. Six key global systemic risks were identified as the initial focus and also as most relevant to long- term investors. These six risks have varying importance to different asset owners based upon each fund’s objectives, policy mandates, capital adequacy and governing structures:
- Climate change
- Water security
- Technological evolution
- Demographic shifts
- Low and negative real long-term interest rates
- Evaluate the usefulness of governance strategies developed to address more gradual but equally destabilising systemic trends in addressing the Covid-19 pandemic-driven market crisis.
- Consider practical investment actions by long-term investors that support economic recovery and seek to generate attractive risk-adjusted returns. We reference such investments as “transformational”.
Triggered by the Covid-19 pandemic, many large diversified asset owners in Asia are re-evaluating their governance policies. Leading asset owners are finding ways to pursue compelling risk-adjusted investment returns while also taking investment actions to help mitigate and address the impact of the pandemic. While the awareness of governance has continued to be on the rise for institutional investors in Asia, there is still very mixed progress against the global systemic trends, which also aligns with the observation from global investors in the collaborative study. The growth opportunities in Asia look to present more rewarding outcomes for institutional investors who are willing to take proactive steps on transformational investment. It is all but certain that this will ultimately differentiate them from others via better outcomes in the future. Although many questions remain regarding the impact of the pandemic, we believe two things are clear:
- The same disciplined, agile governance and implementation arrangements that sophisticated asset owners have developed and adopted following past crises are working well during the current crisis.
- The framework transformational investors are adopting to deal with other global risks can be used to develop an investment policy that addresses the risk of future pandemics.