Geopolitical tension, climate change top risks for investment firms

New research from WTW’s Thinking Ahead Institute in partnership with Australia’s Future Fund has found geopolitical tension, climate change and social inequality to be the top three “systemic risks” facing global investment organisations.

Of the 26 global participants representing more than US$6 trillion of funds, 88 per cent believed systemic risks are set to grow in incidence and size over the next ten years, as 73 per cent agreed that managing complexity is a top concern.

The top systemic risks for investment teams were geopolitical confrontation (84 per cent); climate change (72 per cent); inequality and social challenges, including “polarisation and erosion of social cohesion” (48 per cent); the “plumbing” of the financial system (36 per cent); biodiversity loss and ecosystem breakdown (12 per cent); cybercrime and cybersecurity (12 per cent); adverse outcomes of artificial intelligence (AI) and other frontier technology (12 per cent); natural resource crisis (four per cent); and global pandemic (four per cent).

Roger Urwin, co-founder of the Thinking Ahead Institute, said the report indicated investment companies were more aware of the impact these systemic risks could have on investment and allocations and were showing a “preparedness to address these risks through sustainability measures and whole of fund thinking”.

“There is a rocky road ahead for asset owners. All investors should prepare for a bumpier ride by building more resilience into their organisation – thinking ahead, more agile organisational design, better culture and stronger risk frameworks will all play their part,” he said.

“Facing such global challenges, the structures and teams across the investment world need to be rethought. It has been a pleasure to produce this report with the commitment and considerable C-suite time from these 26 exemplar organisations.

“Organisational design and how organisations are run will be one of the main drivers of investment ‘alpha’ in this portion of the twenty first century.”

The report summary also indicated that while technology is only viewed by 35 per cent of participants as a tool to support the implementation of investment strategies now, 38 per cent also believe artificial intelligence (AI) and machine learning (ML) to be “integral” to their infrastructure over the next three to five years.

The research also found that eight per cent of participants’ current investment technology is “a collection of legacy tools and spreadsheets”; 31 per cent have either an internally-built or externally-built custom solution; and 62 per cent have a combination of all three solutions.

Half of the global investment organisations (46%) also reported challenges in maintaining a cohesive approach to technology implementation.