Ready to enjoy a relaxing summer? Then perhaps you shouldn’t read this. The balmy summer temperatures in some parts of the world is just one symptom of an aspect of the building systemic risks troubling leading asset owners.
At least, that’s according to a global asset owner report just released by the Thinking Ahead Institute in partnership with Australia’s Future Fund, which says 88% of the world’s leading institutional investors expect systemic risks to grow in incidence and size.
The findings are based on a poll of 26 major asset owners across major regions, with all managing at least US$40 billion of assets for a total capital volume of some $6.3 trillion. The list includes four sovereign wealth funds, 14 public pension funds, and eight private and corporate pension funds. They are therefore likely to be among the best informed asset owners worldwide, with the widest perspectives and longest time horizons.
In terms of their asset allocations, “40-30-30 is the new 60-40”, according to the report. Some 42% of that pool is allocated to equities, 29% to debt, 27% to alternatives, and 2% to cash.
The majority or 84% ranked geopolitical confrontation among their top three concerns, 72% cited escalating climate change, where 72% are concerned about escalation, and 48% cited inequality and social challenges, including polarisation and erosion of social cohesion. Only around 36% prioritise another financial crash - “the plumbing of the financial system” - among their top concerns. And 76% expect these systemic risks to become more interconnected and mutually reinforcing.
“There is a rocky road ahead for asset owners,” says Roger Urwin, co-founder of the Thinking Ahead Institute. “All investors should prepare for a bumpier ride.”
At least the asset owners appear to be getting behind these concerns. According to the poll, 96% have publicly articulated investment beliefs favouring sustainability, up from 73% in 2017. And only 4% reject the use of ESG or environmental, social and governance as a term.
How are these asset owners to deal with such a risky environment? The report recommends building more resilience into their organisation, with more forward thinking, “more agile organisational design, better culture and stronger risk frameworks”, among other measures. But one wonders whether they are missing something.
Politicians may have a right to ask staid institutional investors not to interfere with the priorities of government. But perhaps asset owners, especially the state-connected ones, could do more to shape the policy agenda rather than live in fear of it, as many apparently do. All that money should earn them a hearing, as should their investment in our futures.