The World Economic Forum (WEF) has identified six systemic global risks that asset owners across the world must prioritise to create long-term value.
In a newly released framework, which details how investors and asset owners can approach and ultimately mitigate the risks, the WEF identified the six systemic risks and established a governance framework to enable the investment community address an investment gap of $6.27 trillion per year required to mitigate the risks.
The risks include water security, climate change, population growth, geopolitical uncertainty, negative interest rates and technology disruption.
According to the Head of Investing, WEF, Maha Eltobgy, the framework titled “Transformational Investment: Converting Global Systemic Risks into Sustainable Returns”, provides new insights to ensure that the long-term impact of non-traditional risks and opportunities can be better understood. It’s particularly important for investors to consider these ongoing risks now in order to have good responses to address the current economic crisis.
“The COVID-19 pandemic has altered the global economy in unprecedented ways.
“The pandemic has impacted capital markets, liquidity, the financial stability of entire industries and even challenged the fiscal solvency of governments. The Transformational Risk framework offers investors a new way to analyse systemic risks in the 21st century,” he said.
The six systemic risks for asset holders, drawn from the Forum’s Global Risks Report 2020, will require over $6.27 trillion of investments per year to address.
These include opportunities to invest in renewable energy, food production, infrastructure, education and more.
Governments, corporations and insurers are often the “funding entities” for long-term, diversified investment programmes. So, challenges to the financial standing of these funding entities can alter the liquidity budget, risk tolerance and investment time horizon of the world’s largest asset owners.
The framework recently developed for evaluating and incorporating global systemic risks into investment programmes can also act as a guide when addressing the risks created by the COVID-19 pandemic, or to help mitigate the risk of future pandemics.
In the study of these complicated global risks, the World Economic Forum and Mercer, who collaborated together for this white paper, propose a six-step framework to help investors navigate these challenges.
“Asset owners face an evolving set of long-term risks and challenges, accompanied by opportunities for transformational investment. The same six-step framework that asset owners have been applying to other long term systemic risks has turned out to work well when applied to the COVID-19 pandemic and its associated impact on the economy, society and financial markets,” said Rich Nuzum, President of Investments and Retirement at Mercer.
“Disciplined, agile governance and implementation arrangements are being applied by the world’s leading investors to help mitigate systemic risks, while simultaneously enabling the pursuit of attractive expected returns,” he added.