I’m looking for a senior executive from a major institutional investor who has “systemic risk” in their job description. 

I’m looking for a senior executive from a major institutional investor who has “systemic risk” in their job description. 

You get my point, right? An industry accounting for about €8trn in Europe alone, and no one at the top has co-responsibility for systemic risk. 

What does systemic risk mean? It appeared during the 2007-08 financial crisis but investors quickly forgot about it. Regulatory efforts to classify the biggest fund managers as “systemically important” were defeated. High-profile sustainable finance colleagues even advised me to drop the term because it was too challenging and to focus on “transition risk”.

But with COVID-19, it’s back. One definition: it is a positive feedback loop of cascading failure in the financial sector, resulting in a severe economic downturn. Thankfully, central banks appear to have prevented this shock from turning into a systemic threat. 

And as if it wasn’t scary enough, we also have ‘global catastrophic risks’ (which could kill the majority of life) right through to ‘existential risks’ (which could either destroy humanity or prevent civilisation’s recovery). New bioengineering technology could make COVID-19 seem like the common cold. Nuclear weapons accidents, false alerts and terrorist attacks are some dystopian scenarios possible with 15,000 nuclear weapons. And artificial intelligence could have deeply troubling outcomes.

The good news? Policy wonks and regulators are engaged on all these aspects of the systemic-risk iceberg. The Financial Stability Board’s Taskforce on Climate Related Financial Disclosure is, perhaps, the most advanced but the IMF is increasingly active on inequality. Some niche managers are offering investment products which evidence “system level investing”.  

So where does this stop? Should investors be held co-responsible for wars or meteors too?
Exactly my point! For the vast majority of systemic and certainly existential risks, government is key. There are some risks, such as pandemics and cyber security, where sectors like pharma and IT have a big role to play. But even here, corporates cannot replace governments or counteract the harm that governments can do – as in ‘vaccine nationalism’, a nationalistic approach to developing and distributing vaccines. 

Fake news polarises opinion and contributes to gridlock at the best of times, but today we have an ‘infodemic’ – an overload of information with the promotion of unproven drugs and dangerous chemicals like bleach and false claims that tests and vaccines will soon be available for nearly everyone. For sure, social media companies could and should do more about fake news but they will not be able to do so without government intervention.

Put simply, governments need to ensure the security of citizens. Policymakers should limit the build-up of systemic risk and contain crises when they do happen. Now even the editor-in-chief of Bloomberg News and the political editor of the Economist argue that key governments in the west are no longer up to their primary job: protecting their citizens. This comes as no surprise to Henry Mintzberg and other analysts who have long argued that corporates have amassed such power that they have eroded plural society and overwhelmed government.

Traders and hedge funds that thrive on volatility and investors who care only about the short term and lack any concern for the vulnerable or future generations will have stopped reading much earlier. So if you have got to this point, I assume you want to be part of the solution. But you are between a rock and a hard place. You can join the lobbying battle, in favour of resilience and market health, to compensate for the impact of vested interests. US Senator Sheldon Whitehouse and Christiana Figueres advocate this with reference to the climate crisis – given the power of fossil fuel companies – and Larry Fink has done it on structural racism. 

Or you can tell investee companies that lobbying is illegitimate and you want it curbed. UK economist John Kay argues that the solution to excessive levels of lobbying cannot be yet more corporate lobbying. The challenge is that both options are deeply counter-cultural. For example, many investors will not vote against management on corporate political influence resolutions and even this is rightly considered a major achievement. Given this hard choice, most investors have adopted the easier ostrich strategy.

So how has it worked kicking these systemic/catastrophic/existential risk cans down the road? The Doomsday Clock has been placed closer to midnight than ever before: it’s now at 100 seconds to midnight. This should be a warning to humanity and that focus is only on climate change and nuclear war. We seem dangerously ill equipped to even understand how vulnerable we are: the US and UK were actually ranked first and second best prepared in the Global Health Security index. As I write, the OECD is warning of a double-digit contraction and there are genuine fears of another US civil war. 

Raj Thamotheram

Raj Thamotheram

To be blunt, EU investors need to do what they are not at all used to doing. They need to care about corporate political capture and a strategically incompetent government in the US. They also need to care about Brazil causing a climate tipping point by deforestation in the Amazon. And they need to care about another pandemic starting in China or Mexico.

Investors need governments to be better prepared and to act early – more Ardern or Merkel and less Trump or Bolsonaro – while crises can still be mitigated. Investors need governments to resist the erosion of truth and the growing assault on rational discourse, and certainly not be part of the problem. 

Specifically, investors need governments to incorporate best scientific knowledge into decision-making. And investors need governments to collaborate on the challenges they cannot address with nationalism. As Lord Rees, former president of the UK’s Royal Society, says, “the global village will have its village idiots”. Very sadly “they’ll have global range” but investors really do not need political leaders to actively join this group.

What does this mean in practice? Here are my top five changes needed:
• Sit with the painful reality that much leadership training in the for-profit world has been a waste of money at least in terms of systemic risk management. From this humility might come many things, not least a questioning of investment ideology and cultural norms. Big investors with long horizons might acknowledge that they really are ‘universal owners’; they own a slice of the whole market and therefore adapt their actions to enhance the return prospects of the whole pie. 

• Embrace transformational change, both internally in order to have credibility – in parallel – as advocates for going beyond the normal incrementalism.  The new group Actuaries for Transformational Change nailed it at least with their name.

• Upgrade investor collaborative projects so they are as effective as the US Business Roundtable (actively CEO led). Doing annual activity reports, making speeches and signing on to trade body letters is a long way from what is needed.

• Join forces to change the way young investor talent is trained or perhaps more bluntly, indoctrinated. The Vatican resisted acknowledging that Galileo was right for 350 years and, thankfully, the CFA has moved faster than this. Now is the time for a push on its biggest footprint – the curriculum.

• Invest in ‘beta stewardship’ projects which can move the market, probably sector by sector. The World Benchmarking Alliance has much potential in this regard with its multi-sector focus, as do initiatives like Investor Mining and Tailings Safety Initiative. The possibilities are endless but they will not happen without active facilitation. 

Raj Thamotheram is a senior adviser to Preventable Surprises