Research from the Thinking Ahead Institute shows a growing awareness of ‘systemic risks’ and a preparedness to address these risks through sustainability measures and whole of fund thinking among the world’s largest investment organisations.
The analysis shows that 88% of the world’s largest investment teams – representing $6trn in capital – now expect systemic risks to grow in incidence and size, with the main challenge for global investors being the management of complexity.
Examples of systemic risks include geopolitical confrontation, identified as a ‘top three’ concern by 84% of respondents, climate change and inequality and social challenges, including polarisation and the erosion of social cohesion.
Other notable concerns included the robustness of the financial system, biodiversity loss, cybercrime and the impact of AI and other frontier technologies.
Roger Urwin, co-founder of the Thinking Ahead Institute, commented: “There is a rocky road ahead for asset owners. All investors should prepare for a bumpier ride by building more resilience into their organisation – thinking ahead, more agile organisational design, better culture and stronger risk frameworks will all play their part.
“Facing such global challenges, the structures and teams across the investment world need to be rethought. It has been a pleasure to produce this report with the commitment and considerable C-suite time from these 26 exemplar organisations.
“Organisational design and how organisations are run will be one of the main drivers of investment ‘alpha’ in this portion of the twenty-first century.”
Other findings
Turning to potential ways to mitigate and manage such risks and complexity, technology adoption is seen as important but is not yet a mature priority. Nearly two-fifths (38%) view artificial intelligence and machine learning as integral to their future strategic direction as an investment organisation.
However, half of these global investment organisations (46%) report experiencing difficulties in maintaining a cohesive approach to technology implementation. Moreover, only 27% have markedly increased their technology spending in the past five years.
Seemingly ‘softer’ issues around people have also emerged as a key factor, with 65% now saying the attraction and retention of talent is a top three issue. This includes culture, governance, teams and leadership, and how these interact within any organisation aiming to succeed in the world context of growing complexity.
According to the Thinking Ahead Institute, conversations during the production of the report coalesced around the concept of ‘systems thinking’. The ‘system’ is defined as ‘a collection of elements that are inter-connected and fulfil a certain purpose or function’. ‘Systems thinking’ is using understanding of the system like the investment industry or an individual asset owner to explain trends and develop solutions that work holistically.
The report presents the concepts of total portfolio approaches (TPA – whole of fund management) and 3D investing (optimising risk, return and real-world impact) as system thinking applications to investment processes. Currently, 35% of the organisations in the study have adopted TPA, with a further 54% moving in that direction. Meanwhile, 65% embrace 3D investing.
