Trendsetters: Transformational Investment Practices of Advanced Investors - WHITE PAPER MARCH 2021
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Trendsetters: Transformational Investment Practices of Advanced Investors WHITE PAPER MARCH 2021
Cover: Getty/Eoneren
Inside: Getty/xijian, Getty/Francesco Scatena, Getty/stanley45, Getty/borchee,
Getty/Byronsdad, Getty/Think4photop, Getty/peshkov, Getty/MF3d
Contents
3 Foreword
4 Preface
5 Executive summary
7 Key takeaway 1: Integrating trends into strategic decision-making
11 Key takeaway 2: Benchmarking approaches relative to peers
14 Key takeaway 3: Allocating to investment products and innovation
18 Key takeaway 4: Making progress through engagement and industry collaboration
21 Key takeaway 5: Quantifying and assessing the trends
25 Conclusion
26 Climate change self-assessment workshop
29 Contributors
30 Endnotes
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Trendsetters: Transformational Investment Practices of Advanced Investors 2
March 2021 Trendsetters:
Transformational Investment Practices of Advanced Investors
Foreword
The world is transforming at an unprecedented
rate, and to an unparalleled extent. The global
investment community is in a period of great risk
and great opportunity.
Chow Kiat Lim,
Chief Executive Officer,
GIC, Singapore
This White Paper builds on the strong foundation the right vision, governance and implementation
of the preceding World Economic Forum paper on structure. This is a framework that should then
transformational investment that enumerated and serve us well for every trend and transformational
explained the most challenging global trends facing journey ahead.
our economy, environment and society today. In
this next phase, we survey how asset owners have Above all else, it is clear to me that these global
responded to these systemic risks, reflect on shared trends are bigger than any of us. The best way
experiences to date and consider the way forward. forward will likely exceed our individual imaginations
and derive instead from our combined wisdom. It
The insights from the survey are profound. The is only when we come together with a long-term
breadth and depth of perspective, the extent perspective, share best ideas as this initiative has
of integration of global trends into investment tried to do, and co-create ever better solutions, that
processes, and the solutions and engagement we as a global investment community can succeed
plans that have been put in place make one thing – and succeed sustainably – in the years to come.
clear: the global investment community is moving
forward on these trends. I would like to express my appreciation to the World
Economic Forum and Mercer for their excellent
At the same time, it is apparent that we are moving work, and to the Steering Committee for their
at different speeds, and find ourselves at different invaluable insights and guidance. I sincerely hope
stages of the journey. We are forging new paths that every reader of this paper will find its contents
as there are no established roadmaps. This White informative, practical and also inspiring when
Paper highlights the importance of putting in place navigating all global trends ahead.
Trendsetters: Transformational Investment Practices of Advanced Investors 3
Preface
Maha Eltobgy,
Richard Nuzum,
Head, Shaping the Future
President, Investments and
of Investing; Member of the
Retirement, Mercer (MMC),
Executive Committee, World
USA
Economic Forum LLC
Institutional investors need to address evolving The importance of having a coordinated
global systemic trends (e.g. climate change, approach and taking action has never been
geopolitics and low/negative real long-term more evident. The ongoing COVID-19 pandemic
interest rates) within both their own organizations serves as a reminder of the critical importance
and their portfolios. The World Economic Forum’s of understanding complex and interconnected
multistakeholder platform has collaborated with systemic risks and having processes to address
Mercer to develop insights to benefit the global them. Our understanding of investors’ current
asset owner community. Findings from meetings best practice approaches to addressing these
with asset owners who have advanced far down global trends has been developed through several
the path in addressing such trends will positively hundred interviews, an asset owner survey, and
influence global investment practices, supporting virtual events with chief executive officers, chief
asset owners in their organizational development investment officers, chief risk officers, heads of
and helping them identify transformational strategy and heads of environmental, social and
investment opportunities associated with governance (ESG) over the past two years.
these trends.
Produced as part of the World Economic Forum
Our initial White Paper, “Transformational Platform on Shaping the Future of Investing, this
Investment: Converting Global Systemic Risks paper presents actions, initiatives and investment
into Sustainable Returns”, identified the key global opportunities which asset owners can draw from
systemic trends and a governance framework to to pursue forward-looking practices that address
address them. This follow-up paper progresses today’s most challenging global systemic trends.
to solutions, revealing the emerging best practice We would like to thank the asset owners, investment
vision, governance and implementation processes managers, policy-makers, academics and other
that asset owners use to address the trends. experts who have contributed to this work.
Trendsetters: Transformational Investment Practices of Advanced Investors 4
Executive summary
This White Paper builds on findings in the – How asset owners engage with stakeholders to
“Transformational Investment: Converting effect regulatory, policy and company-specific
Global Systemic Risks into Sustainable Returns” change (takeaway 4)
White Paper, which focuses on the investment
opportunities and risks of today’s most challenging – How asset owners use data and tools to improve
global trends. Based on further engagement with investment decision-making (takeaway 5)
global asset owners and asset managers, this
paper addresses: The paper summarizes the actions taken by asset
owners to integrate the trends into their investment
– How asset owners adapt decision-making to and risk management processes. It synthesizes
capture global systemic trends (takeaway 1) the findings into a self-assessment framework that
investors can use to improve their readiness in dealing
– What differentiates an asset owner’s level with systemic challenges. It also presents investment
of advancement in addressing the trends solutions and opportunities that accelerate the
(takeaway 2) industry’s ability to address the trends (click here
for the “Climate change self-assessment workshop”
– What new and tested solutions exist (takeaway 3) chart and click here for additional exhibits).
Global systemic trends that matter most to investors
Climate change*: Risks (e.g. physical and transition) and opportunities (e.g. renewable energy)
associated with climate change
Low and negative real long-term interest rates: Return and monetary policy implications for
investors and stakeholders
Technological evolution: Risks (e.g. cyberattacks and data fraud) and opportunities
(e.g. venture capital and productivity) associated with technological change
Demographic shifts: Implications of ageing populations, changing consumer preferences
and migration
Geopolitics: Implications of global inequality, populism, protectionism and threats to free trade
Water security: Environment, human health and economic implications of declining quality or
quantity of fresh water
*This initiative’s asset owner survey ranked climate change as the most relevant trend from an investment perspective. As such,
this paper’s case studies focus on climate change.
Trendsetters: Transformational Investment Practices of Advanced Investors 5
Key takeaways:
1. Advanced asset owners have put in the effort Report findings informed by:
required to integrate the global systemic – Survey results from over 30 influential
trends into their strategic decision-making asset owners (e.g. sovereign wealth funds,
processes, adapting their vision, governance and pension funds, insurers, endowments,
implementation practices. foundations) representing over $3.4 trillion
in aggregate assets
2. Many asset owners are not aware of how they
compare to peers with respect to integrating the – Over 160 interviews with asset owners,
trends. They are not able to assess their practices investment managers, data providers, academia
relative to industry-leading approaches without a and government agencies, including more than
benchmark of peer organizational practices. 80 interviews with global asset owners
3. When advanced asset owners do not find – Multiple World Economic Forum-led
investment products in the market that address industry events with asset owners and
these trends, they innovate and explore new investment managers
investment approaches.
– Steering committee contributions from GIC
4. Advanced asset owners commit to engaging Private Limited (GIC), Ontario Municipal
with investee companies and to sharing with Employees Retirement System (OMERS),
the broader community so that the industry OPSEU Pension Trust (OPTrust), Swiss Federal
evolves and business practices improve. Pension Fund PUBLICA (PUBLICA) and Zurich
Insurance Group
5. Advanced asset owners understand how to
quantify and assess the implications of changing
regulations, policies and data availability on these
trends, and incorporate these assessments in
their investment decision-making.
Investors’ progress in integrating the trends varies 5. Culture of innovation: Development of new
greatly. Wider awareness of the more advanced expertise, questioning of existing norms and
practices should benefit the global community. exploration of emerging investment themes
By profiling current practices as “developing” and and processes
“advanced”, this paper provides asset owners
with a self-assessment benchmark, enabling 6. Willingness to collaborate: Commitment to
them to compare their vision, governance and share best practices with peers and stakeholders
implementation practices to peers. Throughout this so that the industry evolves more quickly,
work, organizations generally under- or overrated positively affecting regulations and policies
advancement relative to peers, illustrating the
need for a benchmarking framework that identifies Global systemic trends and challenging issues,
competency gaps and helps investors to catch up such as climate change and social injustice, require
with more advanced practices. international partnership. COVID-19 highlighted
the power of international collaboration as vaccine
Traits of advanced asset owners include: approval came in under 12 months. Similarly,
1. Diversity of thought: Cognitive diversity that investors’ increased attention to reporting on
draws on varied experiences and specialized metrics that address business ethics, human rights,
expertise to access insightful perspectives diversity and worker safety, among others, will
improve transparency and industry responsiveness.
2. Accurate self-assessment: An ability and Meaningful data will assist investors when
willingness to draw from internal and external establishing, implementing and tracking strategies
stakeholders to understand and address to capture these opportunities.
organizational shortcomings
This White Paper provides asset owners with ways to
3. Commitment to strategic vision: A shared better address the global systemic trends and pursue
belief that taking action today on factors that higher risk-adjusted returns. It also provides insight
affect the portfolio over the long term will result into investment products that asset owners either use
in enhanced risk-adjusted returns already or are considering in order to take advantage
of opportunities associated with each trend. For
4. Commitment to transparency: Clear example, approximately one-third of asset owners
communication to stakeholders from the board surveyed are considering allocations to sustainable
and senior leadership regarding beliefs, vision agriculture and investments through women- and
and objectives so that stakeholders align and minority-owned organizations, demonstrating that
contribute towards goal fulfilment substantial demand for innovative solutions exists.
Trendsetters: Transformational Investment Practices of Advanced Investors 6
Key takeaway 1
Advanced asset owners have put in the
effort required to integrate the global systemic
trends into their strategic decision-making
processes, adapting their vision, governance
and implementation practices.
Trendsetters: Transformational Investment Practices of Advanced Investors 7Asset owners differ in how they integrate these differences, the research identified
the global systemic trends into their target “developing” versus “advanced” investor
portfolios (i.e. the strategic portfolio that practices across the vision, governance and
incorporates an asset owner’s beliefs, objectives, implementation processes used by asset
long-term strategy and constraints). By capturing owners (Figure 1).
FIGURE 1: Defining current trend approaches
Beliefs, Objectives and
Long-term Strategy
Traditional
Objectives Current Global Trend
and Constraints Approaches Considerations
Liability & Liquidity Climate Change
Requirements Advanced Low Interest Rates
Return Requirement Target Tech Evolution
Time Horizon Portfolio Demographic Shifts
Risk Tolerance Developing Geopolitics
Fees
Water Security
Resources &
Restrictions
Strategy Implementation
Existing Products Product Innovations
Supporting Policy Actions
Sources: World Economic Forum and Mercer
The World Economic Forum and Mercer’s asset PUBLICA: Implementing a climate-efficient
owner survey on how asset owners set their target public equity index
portfolios indicated that most investors combine
objective-driven inputs and opportunistic strategy PUBLICA, a Swiss public pension fund with
considerations (such as PUBLICA; see the box to CHF 42 billion in assets (as of 31 December
the right). The balance varies by trend, however. 2020), annually determines portfolio risk exposure
For example, more than 60% of participants used severity based on potential macroeconomic,
a combined approach to address climate change social, geopolitical, ecological and technological
while only 45% used it to address geopolitics. impact. PUBLICA identifies and prioritizes one or
Indeed, 35% used solely an objective-aligned two systemic risks each year for intensive study to
approach to manage the risks associated with determine portfolio economic consequences. The
geopolitics, partially due to the lack of investment analysis concludes with recommendations for the
opportunities that solve for geopolitics, which limits Investment Committee. In 2018, for example, the
more opportunistic approaches. asset management team identified climate inaction
as a major risk, which resulted in the construction
Some asset owners draw on their objectives and implementation of a climate-efficient public
and beliefs to set target strategic exposures. For equity index for 100% of PUBLICA’s equity
instance, the Environment Agency (UK) Pension exposure. The index leverages a range of climate
Fund aims to invest 15% of total assets in solutions scenarios to underweight companies with negative
that address low carbon, energy efficiency and climate exposure and overweight companies that
other climate opportunities.1 Other asset owners have business models or technologies that reduce
integrate trend considerations on a one-off, greenhouse gas emissions or are best prepared
tactical basis – for instance, making opportunistic to address climate risk. PUBLICA is applying a
allocations to renewable energy infrastructure when similar framework to public bonds.
a fund offers compelling risk-adjusted returns.
Trendsetters: Transformational Investment Practices of Advanced Investors 8GIC: Bringing together diverse perspectives, deep expertise and dedicated capital to
combat climate change
As Singapore’s sovereign wealth fund, GIC’s incorporates traditional factors and how climate
mandate is to preserve and enhance the change would affect the portfolio in the future.
international purchasing power of the reserves To integrate climate’s effects, GIC conducts
under its management over the long term. GIC scenario analysis stress tests and uses tools
believes that climate change materially affects to understand companies’ value at risk due to
all asset classes and should be approached climate-related factors. GIC is building databases
both defensively and offensively. To get initial to assess climate implications beyond companies
buy-in from leadership, GIC collaborated with by understanding countries’ climate policies and
thought leaders, specialized agencies and future commitments to a lower-carbon economy.
scientists to enhance senior stakeholders’
understanding of climate change. To get buy- GIC has the capital to invest into a flexible
in from the investment teams, GIC hosted mandate that proactively allocates to sustainable
internal workshops and identified compelling opportunities such as renewable energy, energy
risk/return implications related to incorporating efficiency, sustainable agriculture, agriculture
climate change. Separately but concurrently technology, green hydrogen, electric mobility
at the national level, education and buy-in was and other initiatives that contribute to carbon
also supported by the Singapore government’s reduction. GIC believes that future product
commitment to spending S$100 billion on innovation can result from asset owners
climate change protection measures. investing together and/or directly, sharing
research and collaborating on the development
From an asset allocation perspective, GIC of frameworks (such as those outlined in this
considers the portfolio’s return distribution, which research) to address complex systemic trends.
Through more than 160 interviews with members of evolved their practices across public and private
the investment community over the past two years,2 investments, successfully integrating relevant trends
the organizational practices that address the trends into their decision-making and portfolio construction
through vision, governance and implementation processes. “Developing” generally represents asset
were identified (Figure 2). This research differentiates owners that are just beginning to address the global
between “developing” and “advanced” investors trends or do not yet have a robust and systematic
based on their transformational progress to date, approach. Most asset owners today are still
while also defining the governance steps that assist evolving, selectively considering the pros and cons
progress. “Advanced” generally represents asset of developing specific processes to address the
owners that already have invested substantial trends. Consideration of investors’ varying ranges
time and resources to develop and maintain of advancement helps investors identify where they
an investment approach that converts a global are on their journeys and how they compare to
trend into systematic implementation. They have advanced peers.
FIGURE 2: Transforming trends into sustainable returns
Generating sustainable returns from global trends requires:
Vision Governance Implementation
Trend alignment with Internal stakeholder Execution by expert
vision/mandate buy-in resources
Understand Collaborate Design Invest Monitor
the overall impact on with similarly situated governance, policies, to manage the and revisit; apply
the funding entity, organizations that are delegation and portfolio’s exposure lessons to improve
objectives and concerned about the accountabilities for to the global systemic policies and
beneficiaries same risks and material systemic risks and proactively processes
opportunities trends allocate to trends
Sources: World Economic Forum and Mercer
Trendsetters: Transformational Investment Practices of Advanced Investors 9Implementing the trends
Application of organizational practices varies by reasons. For technological evolution, more than
asset owner and the level of trend relevance to each 80% of asset owners perceived it as linked to return
organization. In the survey, asset owners ranked enhancement while, in contrast, 60% of investors
the trends from most to least relevant (i.e. climate address geopolitics to manage risk of loss.
change, low/negative interest rates, technological
evolution, demographic shifts, geopolitics and water Figure 3 displays a variety of trend-linked investments
security), but a wide variation exists. For example, that asset owners access through funds, co-
low/negative interest rates are more relevant to investments or directly. For example, asset owners
liability-constrained investors (e.g. defined benefit are investing into low-carbon indices, sustainable
pension plans) than to real growth mandates. protein and green property to address climate
The survey results also highlighted differences in change, and cybersecurity and robotic funds to
how the asset owner community perceives the address technological evolution. Product evolution
trends from risk and opportunity perspectives. has accelerated as asset owners engage managers
A large portion of participants referenced that to align with the Sustainable Development Goals
they address climate change (55%), low/negative (SDGs).3 Additional policy actions, such as global
interest rates (57%) and demographic shifts (43%) carbon pricing, subsidies or reporting transparency,
for both return enhancement and loss reduction should accelerate innovation.
FIGURE 3: Investment products that address the trends
Trends addressed:
Multiple Demographic Shifts Technological Evolution Water Security
Geopolitics Climate Change Low and Negative
Interest Rates
Equity Cybersecurity Sustainable Credit
Desalination
Sustainable Funds Robotics ESG-linked Loans
Social Infrastructure
Sustainable Agriculture Elderly Care (i.e. Hospitals and Green Bonds
Schools)
Enterprise Software Education Transition Bonds
and Artificial Intelligence Affordable Housing
China A-shares, Catastrophe Bonds
Blockchain Regional Asia Women- and/or
Blue Bonds
Minority-owned/
Ocean Management Asia Growth Private
managed Microfinance
Equity
Biodiversity
Digital Infrastructure Women and/or
Conservation
Real Assets Minority-owned/
Sustainable Protein managed
Inflation-sensitive
Energy Efficiency
Sharing Economy Multi-asset Credit
Gold
Land Conservation
Women- and/or Distressed Debt
Inflation-linked Bonds
Minority-owned/ Developed Market
managed Infrastructure Inflation Swaps
Nominal Bonds
Frontier Markets in Emerging Market
Africa Infrastructure Carbon Intensity &
Liquid Alts
ESG-analysed Country
Energy Transition Renewable Energy Fintech Selection
Funds
Green Property Global Macro Funds
Circular Economy
Water Utilities, including Digital Currency
Low Carbon Indices Wastewater Recycling
and Retrofitting Traditional Currency
Water Funds
Sources: World Economic Forum and Mercer
Trendsetters: Transformational Investment Practices of Advanced Investors 10Key takeaway 2
Many asset owners are not aware of how
they compare to peers with respect to
integrating the trends. They are not able
to assess their practices relative to industry-
leading approaches without a benchmark of
peer organizational practices.
Trendsetters: Transformational Investment Practices of Advanced Investors 11Figure 4 illustrates the important variables at a minimum, that the vision and supporting mission
across asset owners’ vision, governance and statements and objectives capture the relevance
implementation pillars that differentiate investors’ of climate considerations. The effort required to do
progress today. Reference to these factors this is multifaceted and organizationally intensive
helps asset owners to self-assess their level of since it involves reflection on mission, beliefs and
advancement with respect to a particular trend. values, buy-in from stakeholders and leadership, and
Taking climate action as an example, most assessment of the challenges of how to integrate
organizations currently reside at the “developing” climate considerations into fiduciary duties and
stage. Advancing from this level typically requires, investment outcomes.
FIGURE 4: Approach differences
Developing Advanced
Vision
Mission, Beliefs, Values Generic Comprehensive
Leadership Buy-in Emerging Established
Competitive Advantage Unaware Aware
Governance
Accountability by Stakeholders/Leadership None Aligned
Policy and Procedures Generic Integrated
Research Capability (including staff) Learning Expert
Implementation
Strategic/Scenario Analysis Basic Trend-adjusted
Target Metrics/Benchmarks Limited Robust
Portfolio Integration Stand-alone Fully integrated
Engagement Price-driven Affect change
Measurement/Monitoring Limited Robust
Sources: World Economic Forum and Mercer
This assessment framework can be used to – Modelling and analysing climate-related
increase organizational awareness about where factors’ impact on valuations and economic
obvious gaps exist, and allows asset owners opportunities when developing strategic asset
to benchmark progress relative to peers across allocation and making investments
vision, governance and implementation (click
here for the “Climate change self-assessment – Aligning incentives through standardized reporting
workshop” chart and click here for additional on applicable metrics/key performance indicators
exhibits). Taking climate action as an example, (KPIs) to internal and external stakeholders
characteristics of advanced asset owners include:
– Integrating the chief sustainability officer or head
– Assessing competitive advantage relative of ESG fully with the investment team across the
to peers in allocating to emerging solutions sourcing, due diligence, value creation (i.e. engage
targeted at a low-carbon economy, capturing to affect change) and monitoring processes
investments’ physical and transition risks,
and anticipating structural changes and – Monitoring and reporting regularly on transition
the impacts of climate-related regulations and physical risks to internal and external
on investments stakeholders
Trendsetters: Transformational Investment Practices of Advanced Investors 12– Benchmarking overall programme progress States on climate considerations) or have limited
against transition milestones (e.g. decarbonization awareness of the trends’ relevance to their core
at the portfolio level, carbon budgets by mandates. Organizational culture, complexity and cost
investment team), objectives and policies considerations represent other common impediments
that advanced asset owners have overcome.
– Allocating capital proactively to solutions that
address climate change, e.g. renewable energy Portfolio integration relates to systematically
infrastructure, sustainable agriculture, green allocating to relevant trends in the investment
property and green bonds decision-making process. Aside from water security
and geopolitics, a growing number of trend-aligned
Large asset owners are remarkably diverse by sub-strategies are available in the market that meet
mandate, size, structure and legislative restrictions, required risk-adjusted return targets and enable
and their vision reflects this diversity. In many investors to both mitigate risk and proactively
cases, beneficiaries can influence priorities of the invest in opportunities that address the trends. For
leadership teams, as long as this does not impede example, multi-asset credit and infrastructure debt
delivery of target returns. For example, a UK investments act as diversifiers to traditional bond
endowment developed its divestment policy due exposure due to low/negative interest rates, and
to student protests about the university’s exposure elderly care investments benefit from, and help to
to fossil fuels. Additionally, the asset owner survey address, ageing populations. A large opportunity
found that more than 80% of vision or mission still exists, however, for investors to make more
frameworks address climate change in some form, trend-related investments and for investment
and that importance to stakeholders, for instance managers to launch additional products.
feedback from beneficiaries, was a driver of this.
Asset owners cannot manage what they cannot
With respect to governance, establishing measure. Lack of measurement standardization
leadership and employee accountability is required inhibits investors’ ability to manage trend-linked
along with supporting principles and directives risks and opportunities at the investment and
reflected in investment policies and procedures. portfolio levels. Organizations that work with
Using climate change as an example, developing data providers, economists, data scientists and
organizations may have a responsible investment investment teams have improved measurement
policy statement, but advanced investors have for trend-related exposures. Advanced asset
translated policies into procedures, amended their owners are aware of key hurdles that impede
benchmarks and integrated climate considerations measurement and monitoring of these exposures,
into their investment committee decision processes and have adapted internal measurement processes
and materials. Staff understand how to implement to adjust for the transition period until metric
climate considerations, with performance capture improves.
evaluations including applicable metrics via
remuneration policy. Asset owners also are hiring chief sustainability
officers and/or chief innovation officers to improve
Implementation varies substantially based on each understanding, measurement and monitoring
trend, even though trend-related scenario analysis of climate change impacts and relevance to
and stress tests are commonly used for most investments. Asset owner size generally is not an
trends. Some asset owners are very specialized impediment, as smaller asset owners with limited
and track portfolios against trend-linked target resources outsource trend-related governance
metrics, such as per annum decarbonization, and implementation to industry experts. For
when accounting for different investment teams’ instance, a £5 billion pension fund uses a
carbon budgets. Others either perceive specific consultant to source investment managers that
trends as less relevant (e.g. low yields matter less allocate capital to private and public market
to growth investors), anticipate legal hurdles (e.g. opportunities targeted at investments that solve
fiduciary liability challenges, especially in the United for a lower-carbon economy.
Trendsetters: Transformational Investment Practices of Advanced Investors 13Key takeaway 3
When advanced asset owners do not find
investment products in the market that address
these trends, they innovate and explore new
investment approaches.
Trendsetters: Transformational Investment Practices of Advanced Investors 14The asset owner survey highlighted trend-linked scalability, proof of concept and
products that investors are already allocating to supportive policy intervention
and those they are considering, but these are
not sufficient to meet all institutional investors’ – Energy efficiency (more than 60%),
needs. Advanced asset owners innovate, creating likely given investable public and
organizational structures and investment approaches private market opportunities linked
that enable access to compelling opportunities, often to the transition to a lower-carbon
before they become mainstream. economy and continued technological
evolution
Investors are allocating capital to some of the
following popular trend-linked solutions (Figure 5): – Multi-asset credit (58%) and distressed
debt (52%) given their abilities to help
– Renewable energy infrastructure (more address low/negative real long-term
than 70% of participants), likely due to its interest rates
FIGURE 5: The most common investment products that address the trends
% of respondents Multiple Climate Low and Technological Demographic
(n=31) Trends Change Negative Rates Evolution Shifts
Renewable
74%
Energy
Developed Market
68%
Infrastructure
Inflation-linked
65%
Bonds
61% Energy Efficiency Green Property
Digital
58% Energy Transition Multi-asset Credit
Infrastructure
China A-shares
Education
52% Distressed Debt
Affordable
Housing
Asia Growth
Global Macro Cybersecurity Private Equity
48% Water Utilities
Funds (Private Equity) Public
Transportation
Enterprise
Software
and Artificial
Intelligence
45%
Emerging Market
Infrastructure
Fintech (Public
Equity)
Sources: World Economic Forum and Mercer
Trendsetters: Transformational Investment Practices of Advanced Investors 15Due to the low and negative interest rate The asset owner survey identified trend-linked
environment, many asset owners are willing to investments under current use and consideration,
explore more complex investment approaches to highlighting strategies in highest demand
increase returns, such as private and emerging (Figure 6):
market debt and leverage facilities. Investors also
use gold and other alternatives for value storage, – Almost one-third of participants are considering
such as cryptocurrencies. One Canadian pension allocations to sustainable agriculture, such as
fund considers interest rate and climate change AgTech venture capital, and land conservation
interrelationships; for example, it now invests in low- (e.g. conservation easement)
carbon infrastructure and green bonds that replace
traditional fixed income. – One-third are assessing private market
allocations to women- and minority-owned
Other popular strategies include infrastructure organizations and managed funds, and more
investments in developed markets, green property, than one-fourth to microfinance
energy transition strategies and digital infrastructure
(e.g. data centres and connections, cloud and – Over one-fourth are considering allocations to
hosting businesses). To benefit from technological green bonds and blue bonds, such as ocean
evolution, one Australian superannuation fund conservation and sustainable fisheries
investigated alternatives to venture capital
by investing in “old-world” companies which
intentionally adopt new technologies that create
legacy business disruption and simultaneously
increase market share.
FIGURE 6: Trend-related investments allocated to and under consideration
80%
70%
23%
60%
50% 23%
23% 26% 32%
40%
23%
30%
23% 32% 52%
26% 32%
20% 39%
29% 35% 32%
26% 29%
10%
16%
10% 10%
3% 6%
0%
Blue Bonds Microfinance Land Low Women-/ Elderly Circular Green Sustainable Sustainable Affordable
Conservation Carbon Minority-managed Care Economy Bonds Agriculture Private Housing
Indices Firms/Funds Equity
Currently Allocated Considering Allocation
Sources: World Economic Forum and Mercer
Index providers play an important role in future Many asset owners recognize the need to allocate
allocations. They influence capital flows, which capital to fulfil the requirements of both investors
in turn affect valuations, tracking error and and societal needs. Unfortunately, numerous
concentration limits. Index providers have investment opportunities, such as African
innovated to support investors with sustainability- infrastructure projects, are not pursued due to
based solutions, especially as investors focus on negative prior experiences, foreign exchange or
benchmarks structured for purpose rather than political risk, or asset owner-specific restrictions
capitalization (see the HSBC overleaf box). For against investing into certain countries. Survey
example, some providers created indices aligned responses indicated African infrastructure exposure
with the EU Paris-aligned Benchmark (PAB) and across only 25% of asset owners, despite the
EU Climate Transition Benchmarks that help to opportunity this provides to address multiple trends,
measure transition and physical risk mitigation such as climate change, demographic shifts, water
efforts, as well as to capture opportunities that may security, technological evolution and geopolitics.
benefit from regulatory and policy-related tailwinds. Similarly, despite water risks materially affecting
Trendsetters: Transformational Investment Practices of Advanced Investors 16HSBC Bank UK: A defined contribution pension scheme benchmark evolves into a global
climate-balanced index
In 2017, the HSBC Bank UK Pension Scheme transitioned its defined contribution (DC) scheme’s
default option from a passive global equity mandate to one with a climate tilt to achieve better risk-
adjusted returns, protection against climate change risks, and a clear ESG engagement policy within
a passive mandate. The DC scheme’s benchmark became the FTSE All-World ex Controversial
Weapons (CW) Climate Balanced Factor Index, an index based on the FTSE All-World equities index.
It excludes the FTSE All-World’s CW index and tilts weights towards certain smart beta factors: value,
quality, low volatility and size. From there, carbon efficiency/emissions, fossil fuel reserves and green
revenues are incorporated.4
human health, world hunger, agriculture and political In response to the scale-related hurdles, some
stability, viable projects that meet institutional investors, such as OPTrust, establish focused
investors’ risk/return requirements remain limited. teams to address innovation and sustainable
investing through incubation portfolios.5 To
To address the financing gap, the Multilateral successfully implement such an approach, the
Investment Guarantee Agency (MIGA) and the organizations typically have separate pools of
International Finance Corporation (IFC) offer capital outside of the traditional benchmarked
products that help to limit risk exposure for programme with separate governance as well as
investors allocating to new geographies. Many incentives incorporated into strategic objectives.
asset owners, however, require additional
protections (for instance, government absorption of To address another common hurdle – new
first loss capital), higher expected returns, increased strategies with limited performance history
transparency and more issuances by blue-chip and proof of concept – a large Asian sovereign
investment banks. Investments that include wealth fund invests small amounts in emerging
undiversifiable risk without clear payoff potential will themes, such as plant-based protein in 2016 or
remain underinvested, stated a chief information e-commerce in China in 2010. This “seeding”
officer from an Australian superannuation fund, approach enhances internal research and
even with additional protections such as MIGA and education about the concept and improves the
IFC; the fund’s ability to hedge risk or to generate fund’s ability to execute when a burgeoning
compensatory return are baseline requirements. business or strategy becomes a major investment
opportunity. If the seeding fails, losses are limited.
The financing gap also exists because emerging
trend-linked solutions often are not scalable and The research found that asset owners
require substantial time and resources to assess. successfully access strategies to capture
Such opportunities also can lack the returns and mitigate risks for many of the
track records and proof of concept that most trends, though significant opportunity exists
asset owners typically prefer. For example, an for asset managers and index providers to
Australian superannuation fund executive and innovate and evolve products further. Along
several other large asset owners explained in with incubation portfolios and seeding
interviews that size can create a competitive approaches, investors also pursue investment
disadvantage. Due diligence costs on small objectives by engaging companies directly or
exposures with limited total return contribution through industry initiatives.
impede the pursuit of innovative opportunities
when compared to larger deals.
These challenges apply to some trends (e.g.
geopolitics, water security) more than others, such
as low/negative rates, demographic shifts and
technological evolution. The latter have numerous
examples of investment strategies that improve
returns or diversify risk. For example:
– Robotics exchange-traded funds (ETFs) to gain
exposure to advances in artificial intelligence,
3D printing, automation and space exploration
– Asia growth private equity to benefit from
the region’s changing healthcare and
consumption preferences
– Elderly care infrastructure and real estate
aligned to ageing populations
Trendsetters: Transformational Investment Practices of Advanced Investors 17Key takeaway 4
Advanced asset owners commit to engaging
with investee companies and to sharing with the
broader community so that the industry evolves
and business practices improve.
Trendsetters: Transformational Investment Practices of Advanced Investors 18What good When scalable investment solutions are not stranded assets total return swap. The swap allowed
is a net zero available, or if asset owners lack the expertise WWF-US to hold a long position in the S&P 500 and
portfolio when or ability to allocate to strategies aligned to these sell cash flows from potentially stranded assets (e.g.
trends, many still find ways to address them coal and oil sands indices) to its counterparty.7 Other
the world burns
directly or indirectly. Engagement and divestment investors take short positions in companies that are
around you?”
examples include: not adequately addressing sustainability issues and
Andrew Fisher, the transition to a lower-carbon economy.
Head of Portfolio – Exclusion-oriented investing or theme-
Strategy, Sunsuper, based ETFs Alternatives to negative screening are also
Australia developing. The Transition Pathway Initiative,
– Assessing physical and transition risk exposures co-founded by the Church of England’s National
to underweight companies adversely affected Investing Bodies and the Environment Agency
by climate change Pension Fund (UK), assesses a company’s
preparedness for a low-carbon economy by
– Overweighting companies with business models tracking corporate management of emissions,
that reduce greenhouse gas (GHG) emissions and evaluates how companies’ expected future
and proactively address climate risk carbon performance compares to international
targets and national pledges made through the
– Engaging with underlying companies to Paris Climate Agreement. This publicly available
promote change data helps investors to determine the best-
prepared companies within a given sector and to
Asset owners surveyed strongly prefer differentiate between the good and bad actors.
engagement and selective trend-related strategy
investments over divestment and negative Surveyed asset owners have approximately two-
screening. When the latter are used, asset owners thirds of their portfolio exposure in liquid assets and
typically divest from companies with high carbon the remainder in illiquid holdings, making integration
emissions, limited ability to transition or high of the trends via both public and private market
stranded asset risk. Some investors choose to securities important. Approaches commonly used
decarbonize their portfolios because they wish by asset owners for climate change include:
to support the PAB with assets invested in line
with Paris Climate Agreement goals. Andra AP- – Dependency on public markets for scale
fonden (AP2), one of Sweden’s national funds that and familiarity with engagement and
supports state pensions, has adjusted holdings stewardship principles
in global equities and corporate bonds to ensure
consistency with the PAB. AP2 will not invest in – Increased support for shareholder resolutions
companies that exceed certain revenue levels that require better corporate disclosures, e.g.
from coal (1%), oil (10%) and gas (50%), or from commitment to report scope 1 and 2 emissions
utility companies using fossil fuels (50%). AP2’s
approach removed approximately 250 companies – Shareholder activism to improve reporting and
from the portfolio.6 measurement by listed companies
Stranded asset total return swaps represent another – Leveraging private market traits: long-
form of divestment. For example, Bob Litterman, termism and promoting sustainability via
Investment Committee Chair of World Wildlife Fund access to management and representation
in the United States (WWF-US), created the WWF on corporate boards
Trendsetters: Transformational Investment Practices of Advanced Investors 19In order to align fiduciaries with greenhouse gas emission reduction goals,
changing consumer preferences and technological advances will move us in the right
direction, but alignment of public policy (higher regulatory standards or some form of
carbon pricing) will be a powerful accelerant. Investors must incorporate these into
investment decisions to the degree they are material, which will vary across sectors
and time. Of course, these are not mutually exclusive, but I think a useful paradigm
for how investors and public policy should work together in a fiduciary-safe manner
to advance societal goals.”
Donald Raymond, Chief Investment Strategist, Qatar Investment Authority, Qatar
More than 90% of survey respondents believed expanding global community committed to
that further regulatory and policy action would addressing global challenges. For example, Figure 7
accelerate action to address climate change. includes a selection of asset owner relevant industry
Asset owners expect policy intervention to organizations that engage with stakeholders to:
affect corporate operating costs and asset
values due to changing taxes, subsidies and – Reduce emissions
regulations. In anticipation, asset owners may
use the Paris Agreement Capital Transition – Become better educated on climate change
Assessment (PACTA)8 or refer to the Global and related corporate actions
Investors for Sustainable Development Alliance
(GISD).9 Interventions can include financial – Incorporate ESG issues into investment
incentives to reward companies that create analysis and the decision-making process
sustainable stakeholder value or subsidies to
encourage alignment with the Paris Climate – Improve diversity in the investment
Agreement and SDGs. management sector
In addition to policy action, asset owner – Enhance engagement with central banks
engagement with peers, investment managers,
data providers, multistakeholder platforms – Accelerate the integration of financial risks into
and corporations has flourished into an their processes
FIGURE 7: Asset owner relevant industry organizations
Global Investor Investor Leadership
Net-Zero Asset
Climate Action 100+ Coalition on Climate Network
Owner Alliance
Change (ILN)
The Central Banks
World Resources
and Supervisors Portfolio
One Planet Institute/Science
Network for Decarbonization
Sovereign Wealth Based Targets
Greening the Coalition
Funds Initiative
Financial System (PDC)
(SBTi)
(NGFS)
Principles for
The Geneva Responsible
The Investor Agenda
Association Investment
(PRI)
Source: World Economic Forum and Mercer
Developing asset owners can benefit from peer collaboration and outputs of these organizations as they
enhance their vision, governance and implementation approaches.
Trendsetters: Transformational Investment Practices of Advanced Investors 20Key takeaway 5
Advanced asset owners understand how to
quantify and assess the implications of changing
regulations, policies and data availability on these
trends, and incorporate these assessments in
their investment decision-making.
Trendsetters: Transformational Investment Practices of Advanced Investors 21Quantifying the impact of these trends (e.g. The “E” (i.e. “environment” for climate change,
flooding, migration, ageing populations) can natural resources, water security, and pollution
affect corporate valuations. Clear measurement, and waste) and “G” (i.e. “governance” for anti-
standards and benchmarks strengthen investors’ corruption, risk management, shareholder rights
abilities to act as responsible stewards of capital, and tax transparency) in ESG are not the only
and to affect change by creating accountability material considerations. Advanced asset owners
through company engagement. Although the also increasingly focus on the “S” (i.e. “social”
standards and tools used for measurement and for diversity and inclusion, workplace safety,
monitoring are evolving rapidly, many investors income inequality, job reskilling, modern slavery,
lament that substantial improvement from current child labour, physical and mental health). There
practices is required to understand portfolio- is pressure for asset managers and companies
related risks and opportunities and to align to address inadequate policies and social-related
portfolios with their organization’s objectives. benchmarks that now exist. For example, the
World Benchmarking Alliance developed a series
Advances at data providers have increased access of guidelines that rank and measure over 2,000
to information. Inadequate standardization and data companies based on contributions to the SDGs.12
quality, however, create challenges in measuring Social-related benchmarks include:
and monitoring non-traditional investment metrics.
For example, ESG measurement is particularly – Gender – How corporations drive and promote
difficult in private markets and in geographies with gender equality and women’s empowerment
varied regulatory standards. A CFA Society survey across their entire value chain
in 2019 showed that only 21% of asset owners
integrate ESG across portfolios despite the potential – Corporate human rights – Company policies,
benefit from evaluating ESG factors across all asset processes, and practices used to systematize
classes.10 Advanced asset owners who determine human rights approaches across the workforce
how to incorporate ESG analysis into their and responsiveness to allegations
investment processes should be able to secure an
information advantage. – Digital inclusion – How corporations advance a
more inclusive digital economy and society
Regulatory advances around the globe and
resulting frameworks and standards should These improvements in measurement advance
support asset owners. For instance, the Task global efforts to address social and demographic
Force on Climate-related Financial Disclosures trends. The investment industry must still solve
(TCFD) framework helps investors understand the broader ESG measurement challenges, however,
impacts of climate change on their investments. especially because many asset owners already
Meanwhile, standards from the Sustainability operate in jurisdictions that recognize ESG as a
Accounting Standards Board (SASB) identify material fiduciary consideration.
financially material sustainability issues by industry.
Lastly, the World Economic Forum’s Stakeholder Pension funds in the United Kingdom are required
Capitalism Metrics improve consistency and to report financially material ESG and climate
comparability of information reported by change risk.13 Meanwhile, in Australia, participants
companies, increase corporate ESG reporting, and sued a superannuation fund for lack of transparency
encourage solutions for non-financial reporting.11 in accounting for climate change and for not
When fully adopted, these disclosures will help illustrating such analysis.14 The participants won
investors understand financial and operating the suit and set a precedent; Australian schemes
impacts of global systemic trends. In addition, now need to clarify how they are addressing
once standardized SASB scores are readily climate change. Investors currently under more
available for most companies, comparability and ambiguous interpretations regarding ESG fiduciary
investor analysis will improve. consideration (e.g. United States) can potentially
Corporate value is ultimately driven by the abstract combination of organizational
and human capital that enables agile navigation of a broad range of plausible future
states. For long-term investors, due diligence on this capability cannot be found in
quarterly earnings reports alone. It requires assessment of far less tangible markers
of corporate capability.
In my view, central to this is a firm’s ethical heartbeat – it frames the way decisions
under stress will be taken. And its reflection can be found in how precisely purpose is
articulated; how transparently that aligns to identifiers of organizational and individual-
employee success; whether there is any appreciation of systems-risk or of stakeholders
as advocates; how decision-making is distributed; and the extent to which failure is
able to be tolerated as an inevitable part of innovation.”
Alison Tarditi, Chief Investment Officer, Commonwealth Superannuation Corporation, Australia
Trendsetters: Transformational Investment Practices of Advanced Investors 22benefit by anticipating the implications of future public media and stakeholder sources daily in 20
regulatory changes and leveraging perspectives languages across 96 ESG factors aligned with
from markets that already recognize ESG factors as international standards and frameworks.15
material to fiduciary considerations.
As another example, Wellington Management’s
Some investors complement traditional ESG new climate exposure risk assessment (CERA)
analyses with information from data analytic tool helps investors across its platform as well as
providers that rely on artificial intelligence and data climate research advisory partners CalPERS and
science to obtain an outside-in perspective of Ontario Teachers’ Pension Plan better understand
corporate violations or to measure climate-related companies’ physical climate risks, e.g. extreme
risks around the globe. This information enables heat, drought, wildfires, hurricanes, flooding and
asset owners to engage with portfolio companies water access. The CERA tool leverages data
and proactively address areas of concern. For science and quantitative models to analyse the
example, RepRisk assesses ESG risks related impact of climate change on global capital market
to 165,000 public and private companies and segments. The tool was developed in collaboration
40,000 infrastructure projects through its use with Woodwell Climate Research Center, a leading
of artificial intelligence, machine learning and climate change think tank that partners with global
human intelligence. It screens more than 100,000 private and public organizations.
Trendsetters: Transformational Investment Practices of Advanced Investors 23The asset owner survey identified common tools extent. Many asset owners referenced drawing from
used for investment and risk analysis (Figure 8). the climate scenarios highlighted by the TCFD to
Across all trends, the most common included conduct scenario analysis for climate change.16
identifying trend-specific investment products,
macroeconomic risk analysis, sectoral analysis By assessing material risk factors and drawing from
and scenario testing. Other tools surveyed were the industry’s tools, frameworks and standards,
only highly applicable to one or two of the trends, investors have the ability to better understand and
such as ESG measurement for climate action monitor their investments. Advanced asset owners
and water security or geographical assessments draw from best practices and emerging tools to
for geopolitics. position their portfolios for evolving markets and
regulatory environments. The resources enhance
Despite the relatively large number of climate their understanding of their portfolios and enable
change-linked mitigation and adaptation investment advanced investors to be more agile when
solutions available in the market, the asset owners responding to unforeseen events, such as the
surveyed currently access these only to a moderate COVID-19 pandemic.
FIGURE 8: Usage of investment, monitoring and risk measurement approaches
Climate Low and Technological Demographic Geopolitics Water
Change Negative Real Evolution Shifts Security
Long-term
Interest Rates
Use of Investment
2.7 1.8 2.0 2.7 3.3 3.3
Products
Macroeconomic Risk
2.8 1.6 3.1 2.2 1.9 3.8
Analysis
Sectoral Analysis
1.9 2.9 1.9 2.7 2.7 2.8
Scenario Testing
2.2 1.8 3.6 2.9 2.6 3.5
Geographical
2.8 2.5 3.0 2.9 1.5 2.9
Assessments
Engagement on
Targeted Community 2.0 3.5 3.2 3.4 3.0 2.9
Initiatives
Engagement with
1.7 3.9 3.3 3.4 3.2 3.0
Investee Companies
Assessment of
2.0 3.8 2.8 3.1 3.0 3.6
Transition Risks
ESG Measurement
1.5 4.6 2.9 3.3 3.5 2.2
and Monitoring
Demographic Data
4.3 3.5 3.5 1.9 3.7 4.3
Analysis
Negative Screening
2.8 4.6 4.4 4.7 3.8 3.8
High Usage (1.0-2.4) Moderate Usage (2.5-3.5) Limited/No Usage (3.6-5.0)
Results are rounded to the nearest tenth. Based upon a Mercer and World Economic Forum survey of 30 global asset owners with more than $3.4 trillion assets
under management (October 2020).
Sources: World Economic Forum and Mercer
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