Leaders: How Investors Overcome Systemic Risks

  • In 2021, asset owners ranked climate change as the top systemic risk affecting their portfolios and organizations.
  • A three-year study by the World Economic Forum and Mercer shows that early-stage investors follow three steps to overcome systemic risk.
  • A Climate Benchmark tool was developed from the results for other investors to assess their performance and incorporate these steps into their own investment practices.
  • The document also provides the solutions already implemented to overcome the four most common barriers to climate investment.

Asset owners around the world are rapidly adapting their investment processes to respond to the risks and opportunities associated with climate change. In a recent study the World Economic Forum and Mercer have identified specific activities that dynamic asset owners are using to address the most common challenges that hinder climate investing. These challenges include:

1. Define and implement a transition roadmap;

2. Measure achievement and success;

3. Actively and effectively engage beneficiary companies; and

4. Define climate reporting metrics by asset class and by manager.

Even the most sophisticated investors grapple with the myriad of activities required. By focusing on pioneer investors in this space, the research is accelerating the progress of the broader investment community in climate investing. Dozens of asset owners have already used a climate benchmark tool to measure their businesses against their peers around the world. This helped uncover their shortcomings and improve their vision, governance and implementation of activities integrating climate change into their investment strategies.

Three steps investors follow to overcome systemic risks, such as climate change

Global asset owners and managers face the challenges of transformational investing daily in the pursuit of absolute, risk-adjusted returns. The World Economic Forum and Mercer conducted a study over three years to discover how investors are addressing the most common challenges associated with climate change and geopolitics. The focus was specifically on how investors apply vision, governance and implementation activities to translate these challenges into investment opportunities.

1. Familiarize yourself with advanced practices from investors around the world who have already looked into climate investing.

2. Uncover current gaps by comparing current practices to the activities of advanced practitioners.

3. Refine vision, governance and implementation processes that integrate climate investment factors into ongoing investment decision-making, consistent with strategic objectives, stakeholder requirements and fiduciary obligations.

Research has found that asset owners with well-developed vision, governance and implementation structures have a clear sense of “who they are”, enabling them to react decisively in response to systemic risks .

How to compare progress

The research identifies over 80 investment-related activities that integrate climate factors into investment decision-making. By translating advanced practices into a peer-to-peer climate benchmark, the asset owner community can use the tool to assess their current activities.

Illustrative results of the Climate Benchmark peer analysis in 10 activity categories (1 = not started; 5 = fully developed).

Image: Mercer Climate Benchmark Tool

Benchmarking across dozens of asset owners consolidated the tool’s findings and validated the key climate investing challenges facing investors. Pacesetters: Setting the Tempo of Advanced Climate Investing provides the solutions already implemented to overcome the four most common barriers to climate investing.

How to overcome the four main challenges hindering climate investment

1. Define and implement a transition roadmap

Uncertainty about the pace and nature of the transition to a low-carbon or zero-carbon global economy presents challenges for investors looking to maximize risk-adjusted returns. The transition roadmaps translate the inherently complex and interrelated challenges of decarbonizing the global economy into steps applicable to investors that meet the unique goals of asset owners and stakeholder requirements. Developing a roadmap often serves to unify organizational beliefs and produces forward-looking policy and governance action steps.

2. Measure achievements and success

Standard investment performance benchmarks are ineffective in measuring the results of climate investment activities. Measuring achievement and success comes from understanding the advanced climate practices of other investors as well as learning from how they define, monitor and communicate the results of climate-related investments. The Climate Benchmark captures activities that integrate climate investing into investment decision-making. A commitment to these activities leads to significant adjustments both in measurement processes and in how to successfully pursue climate investment practices.

3. Actively and effectively involve beneficiary companies

In most sectors, the decision to engage or disengage has become increasingly nuanced. Asset owners, determined to enhance the long-term value of the companies in which they invest, undertake the full range of stewardship activities available to them. Key characteristics of successful programs, whether conducted internally or delegated to external managers, include being proactive in identifying and engaging companies on material risks, rather than reactive, while putting emphasis on quality of engagement rather than quantity.

4. Define climate reporting metrics by asset class and manager

Challenges with developing metrics include a lack of standardization, disclosure, and awareness of best practices. Today, asset owners are actively integrating available data into investment decision-making. An awareness of the financial materiality of the data as well as the associated limitations is key to tracking progress against transition roadmaps, manager performance and commitments.

To learn more about the approaches asset owners are taking in these areas, read our companion report – Pacesetters: Setting the Tempo of Advanced Climate Investing.

Learn more about the work of the World Economic Forum in Shaping the Future of Financial and Monetary Systems.


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