The UK Sustainable Investment and Finance Association (UKSIF), Scottish Widows and Canbury have outlined the rationale for an enhanced focus on systemic risk in financial services with a clear framework for action in a report published at UKSIF’s Spring Conference in Edinburgh.
The report – Systemic Risks: A Framework for Portfolio Resilience – is designed to demonstrate the importance of systemic risks, which are frequently not addressed effectively in the market. Systemic risks are un-diversifiable risks that can impact entire markets or economic systems through complex interconnections, potentially triggering chain reactions across multiple sectors and disrupting overall market growth. Such risks include climate change, nature and biodiversity loss, income inequality, artificial intelligence, geopolitics and trade wars.
Exposure to overall market performance (beta) is the primary driver of investment returns, the report suggested. As such, for all investors – but especially for diversified institutional investors with long time horizons – it is vital that systemic risk identification, management, and stewardship are practiced across portfolios. However, at present, such risks are not commonly addressed as part of standard asset management approaches to stewardship.
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By embedding systemic risk management as part of investment objectives and aligning teams, asset owners can enhance portfolio resilience and potentially have a positive impact on sustainability outcomes, too.
“For diversified institutional investors with long time horizons, the report emphasises that overall market growth is the primary driver of investment returns. As such it is vital that systemic risks with wide-ranging impacts across markets are addressed to build more resilient portfolios and also contribute to a more sustainable world for pension savers. To achieve this, we need to engage across the wider system that corporates operate in,” Eva Cairns, head of responsible investment at Scottish Widows, highlighted.
James Alexander (pictured), chief executive of UKSIF, added: “As this new report makes clear, pension funds and other asset owners are among the very few truly long-term actors in the economy. Meanwhile, asset managers’ approaches to systemic risks are often insufficient.
“To protect long-term returns, it is vital that the whole industry take systemic risks more seriously and asset owners recalibrate their focus towards these issues. This includes engaging with governments, highlighting the impact that systemic issues are likely to have on portfolio values, and considering systemic risk and the development of sustainable markets at all levels of decision-making.”
