The World Economic Forum (WEF) has identified six systemic risks and established a governance framework to enable the investment community to address an investment gap of $6.27 trillion per year required to mitigate these risks. The risks include water security, climate change, population growth, geopolitical uncertainty, negative interest rates and technology disruption. "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," says Maha Eltobgy, head of investing, World Economic Forum. "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 analyze systemic risks in the 21st century." 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 programs. 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 programs 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. Decision-making framework 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." A road map and decision-making framework for governance 1. Understand — the overall impact on the funding entity, objectives and beneficiaries 2. Collaborate — with similarly situated organizations that are concerned about the same risks and opportunities 3. Design — governance, policies, delegation and accountabilities for material systemic risks 4. Invest — to manage the portfolio's exposure to the global systemic risk 5. Transform — through driving investment strategy that delivers change 6. Monitor — and revisit; apply learnings to improve policies and processes Case studies indicate that sovereign wealth funds and other long-term investors are already positioning themselves to respond to the impact of these global systemic risks on investment. However, greater innovation in practice and commonality of action are still required in most areas. The World Economic Forum will continue to research ways that investors and other asset holders can pursue stakeholder capitalism. — SG
