The UK asset owner landscape is at an inflection point when it comes to systemic risks, according to the UK Sustainable Investment and Finance Association (UKSIF), which today released a report on the importance of systemic stewardship.
Major structural shifts in the pensions market, such as maturing defined benefit schemes and accelerated pension pooling, are recalibrating the way investors can influence the intermediation chain and can increase asset owner influence, according to the report.
“These changes are developing more sophisticated institutional investors with enhanced capabilities to address systemic risks, all whilst coinciding with the UK’s strengthening position as a global investment destination and a political window for impactful policy engagement,” it said.
The report - Systemic risks: A framework for portfolio resilience – also highlighted the importance of tackling these risks, which it argues are frequently not addressed by the market.
Investors must take ‘big picture’ risks such as climate change, AI, and geopolitical instability much more seriously to protect long-term returns, according to the report, which sets out to explain systemic risks in a way that is actionable for asset owners.
Poorly understood
Speaking on a panel today discussing the report’s findings at UKSIF’s Spring Conference in Edinburgh, Shipra Gupta, investments stewardship lead at Scottish Widows, and Will Martindale, managing director and co-founder of Canbury, stressed that if the market suffers due to unchecked systemic risks, so will returns.
Yet many asset managers still overlook these risks in their strategies, they added.
“Systemic risk is becoming the new ESG, a term we bandy about without really understanding what it means,” said Martindale.
The report highlights that exposure to overall market performance (beta) is the primary driver of investment returns. 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 practised across portfolios.
However, at present, such risks are not commonly addressed as part of standard asset management approaches to stewardship, UKSIF stated. 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, it added.
Crucially, to build resilient portfolios, investors need to act now by factoring systemic risks into their decision making and pushing for change across the entire financial system, the report also stressed.
Major structural shifts in the pensions market, such as maturing defined benefit (DB) schemes and increased Local Government Pension Schemes (LGPS) pooling, are recalibrating the way investors can influence the intermediation chain, said Martindale, who added these changes can increase asset owner influence.
Looking ahead, James Alexander, UKSIF’s chief executive officer, said: “As this new report makes clear, pension funds and other asset owners are amongst 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 article was edited after publication
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