The recently published report from the Thinking Ahead Institute highlights a growing awareness of systemic risks among the world’s largest investment organisations. The study reveals that these asset owners, who collectively manage $6 trillion in capital, are increasingly preparing to address these risks through sustainability measures and comprehensive fund management strategies.
A striking 88% of the world’s largest investment teams anticipate that systemic risks will grow in both incidence and magnitude. The most prominent concerns identified include geopolitical tensions, climate change, and social polarisation. Specifically, geopolitical confrontation is a top-three concern for 84% of respondents, while other significant issues include the robustness of the financial system, biodiversity loss, cybercrime, and the impact of advanced technologies such as artificial intelligence.
Roger Urwin, co-founder of the Thinking Ahead Institute, emphasises the need for asset owners to build resilience into their organisations to navigate these complex challenges. He advocates for forward-thinking, agile organisational design, improved culture, and stronger risk frameworks. According to Urwin, the way investment organisations are structured and managed will be a critical driver of investment success in the coming decades.
The report underscores the role of technology and talent in managing systemic risks. While 38% of the surveyed organisations view artificial intelligence and machine learning as crucial to their future strategies, many face challenges in maintaining a cohesive approach to technology implementation. Notably, only 27% have significantly increased their technology spending over the past five years.
Talent attraction and retention also emerge as critical concerns, with 65% of respondents citing it as a top issue. This encompasses aspects such as culture, governance, team dynamics, and leadership, all of which are essential for success in an increasingly complex world.
The concept of ‘systems thinking’—understanding the interconnected elements within the investment industry—is central to the report’s findings. Systems thinking helps explain trends and develop holistic solutions. The report introduces total portfolio approaches (TPA) and 3D investing (optimising risk, return, and real-world impact) as practical applications of systems thinking. Currently, 35% of the organisations have adopted TPA, with an additional 54% moving in that direction. Meanwhile, 65% embrace 3D investing.
Climate change stands out as a particularly challenging systemic risk. With 72% of respondents identifying it as a significant concern, the report highlights the difficulty of managing climate-related risks through traditional diversification and hedging techniques. The collision of transition and physical risks could lead to substantial economic damage and system-wide asset losses.
Jeffrey Chee, WTW global head of portfolio strategy, talking at an event in Sydney last week, said that investors need to consider both transition and physical risks simultaneously, as they are likely to coincide and produce significant negative outcomes. This dual risk scenario requires a more integrated approach to risk management and strategic adaptation.
Addressing systemic risks extends beyond climate change to include biodiversity loss, societal issues, and the transition to a circular economy. These interconnected challenges require comprehensive strategies that go beyond mitigation to encompass adaptation and systemic change. Improving biodiversity outcomes, reducing societal vulnerability, and transitioning to a circular economy can collectively enhance resilience and sustainability.
The Thinking Ahead Institute’s report underscores the need for asset owners to rethink their strategies in the face of growing systemic risks. By embracing systems thinking, enhancing organisational resilience, leveraging technology, and prioritising talent, investment firms can better navigate the complexities of the modern world. As systemic risks evolve, proactive and adaptive approaches will be essential for long-term success.
Read the report here.
