Military confrontation, political and economic instability, unprecedented migration exacerbated by climate change, changing labour markets, and low fertility rates were among the forces at play in an alternative capital allocation roadmap discussed by speakers at the IPE Conference last week.
According to Parag Khanna, author and founder of AlphaGeo, climate stress and volatility are indiscriminate, affecting regions from sub-Saharan Africa to the US, where there is already a reverse migration triggered by home insurance premiums.
Khanna underlined that most of the world’s young population today inhabits areas that are heavily climate stressed, which will weigh on GDP in a way that has not yet been fathomed.
Many sectors of the economy are already affected by heat stress, with droughts impacting agriculture and power grids.
This makes resilience to climate shocks an important aspect of asset allocation nowadays, Khanna said.
No global stone should be unturned
Yet the investment community also operates in a “geopolitical marketplace” where there is a “meaningful economic role” in the global system for every region of the world, according to Khanna.
“No region should be ignored in asset allocation,” he said.
Khanna also advocated investment to enable social and physical mobility, to encourage people to move where labour markets are strong and housing is affordable.
Parts of central Asia may not feature in major indices but offer opportunities from the perspective of climate resilience, reforms, population growth, and economic modernisation,” Khanna noted.
Phillip Brown, emeritus professor at the UK’s Cardiff University and programme director for digital futures of work, raised questions about the labour market.
“The key challenge is [about] what a human-centric future of work would look like, and how investors can work with companies to try to ensure that they can actually sustain quality of labour for people in organisations,” Brown said, pointing to the need for data and transparency.
The demographic transition is a megatrend like technological innovation and climate change.
Lower fertility rates are the result of people choosing to have children later in life, and the trend towards less stable relationships, according to Anna Rotkirch, research professor at the Population Research Institute at the Family Federation of Finland.
“Yes, we need to revalue human beings, but we also need to revalue the production of human beings,” Rotkirch said, referring to time spent by women outside the workforce in maternity and childraising.
AI can help pension board decisions but won’t replace trustees
AI should be able to help pension funds make better decisions and prevent human biases but can never completely replace human decision-making, according to a panel at IPE’s Conference dedicated to the impact of artificial intelligence on pension fund trustee boards.
“Man and machine together will always do better than man only or machine only,” said Martijn Vos, chief operating officer at the Rotterdam-based consultancy Ortec Finance and co-author of the book Decision making for pension fund boards, speaking at the IPE Conference last week.
Vos suggested two main areas where AI can improve decision-making by boards. “The first is in helping to identify alternatives to nail a decision. This is where it often goes wrong because of the pitfalls of human biases,” he said, highlighting the limited capacity of humans to process information.
“When it comes to gathering info, I’m afraid we have already lost to the machines, so the data processing we should leave to them,” Vos added.
Second, AI’s capacity to gather data very quickly also makes it useful in reviewing decisions made by pension fund boards, Vos noted.
Data are often not yet available: “As long as the data is not complete, you have to be careful using models, Vos added.
“Also, AI will always comply with regulation even if doing so is not the best solution.”
Despite these limitations, a large majority of the audience during the conference session responded positively to a question about whether AI would make better decisions than an eight-member investment committee.
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