The report’s aim is to help institutional investors allocate capital towards positive societal and environmental impact while achieving diversified long-term returns. The report acknowledges that systemic risks and the consequential uncertainty challenge investors’ ability to evaluate investment opportunities adequately. Institutional investors need to adapt their approach, become the champions of long-term thinking, and tackle complicated global systemic risks.

Global systemic trends

The report identifies current global systemic risks, including climate change, water security, geopolitical instability, technological evolution, demographic shifts, and low and negative real long-term interest rates. It notes that these trends can overlap and suggests that addressing one issue could offer a hedge against other risks. The report proposes that investors can use a macroeconomic risk analysis technique like the one employed in integrating Environment, Social, and Governance (ESG) in sovereign debt fund management to evaluate these trends’ materiality.

Transformational investment opportunities and challenges

The report argues that some investment opportunities can help mitigate global systemic risk, offering sustainable returns beyond traditional markets. Private equity, impact investments, infrastructure, venture capital, and climate bonds are examples of opportunities that investors can leverage to align their investment objectives with global systemic risk awareness. However, these investments are not without challenges, such as ambiguous metric conventions, liquidity constraints, and challenges due to diversification.

Governance framework

The report suggests that developing a risk management framework with a governance roadmap is critical to navigate global systemic risks. The governance framework should comprise the following steps: “understand the impact, collaborate to integrate global systemic risk, engage, implement, invest, and transform and monitor and revisit”. Investors must understand the overall impact of global systemic risks on beneficiaries, objectives, and risk tolerance. It is also crucial to integrate the risk management process into the investment decision-making process, engage with relevant stakeholders, implement the appropriate governance structure, mitigate risks through strategic asset allocation, and revisit the framework to fine-tune it continually.

ESG issues discussed

The report discusses numerous ESG issues, with primary emphasis given to the systemic risks impacting economic and environmental outcomes. Climate change, water security, geopolitical stability, technological evolution, demographic shifts, and low and negative real long-term interest rates are the primary ESG issues discussed in the report. The report suggests adopting macroeconomic risk analysis techniques to assess ESG materiality in assessing long-term investment opportunities.

Recommendations

The report provides a six-step governance roadmap framework that investors can utilise to address global systemic risks. This robust governance framework aims to mitigate and address the impact of ESG issues while achieving sufficient returns. The roadmap framework requires investors to understand the overall impact of global systemic risks, collaborate to integrate global systemic risk, engage with relevant stakeholders, implement the appropriate governance structure, mitigate risks through strategic asset allocation, and revisit the framework continually.