New research from the Thinking Ahead Institute in partnership with the Future Fund, the Australian sovereign wealth fund, shows a growing awareness among the world’s largest investment organisations of ‘systemic risks’ and a preparedness to address these risks through sustainability measures and whole of fund thinking.
As of 2024 the new analysis shows that 88 per cent of the world’s largest investment teams now expect systemic risks will grow in incidence and size.
The authors write that the 26 funds in the peer group for this study were selected for their strong governance, significant size, and thoughtful international perspectives. Together the group represents over USD6 trillion of extremely influential capital.
Examples of systemic risks include (1) geopolitical confrontation identified as a ‘top three’ concern by 84 per cent of respondents, (2) climate change, where 72 per cent are concerned about escalation, and (3) inequality and social challenges, including polarisation and the erosion of social cohesion (48 per cent concerned).
Other notable concerns include the robustness of the financial system, biodiversity loss, cybercrime and the impact of AI and other frontier technologies.
Roger Urwin, co-founder of the Thinking Ahead Institute, comments on the new findings: “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.
“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.”
Complexity, technology and the rise of systems thinking
With a growing variety of external factors, opportunities and threats, 73 per cent of investment organisations now say managing complexity is a top concern.
Turning to potential ways to mitigate and manage such risks and complexity, technology adoption is seen as important but is not yet a mature priority. Nearly two-fifths (38 per cent) view artificial intelligence and machine learning (AI/ML) as integral to their future strategic direction as an investment organisation.
But half of these global investment organisations (46 per cent) report experiencing difficulties in maintaining a cohesive approach to technology implementation. Moreover, only 27 per cent have markedly increased their technology spending in the past five years.
Seemingly ‘softer’ issues around people have emerged as a key factor for today’s largest investment organisations with 65 per cent now saying the attraction and retention of talent is a top three issue. The issues discussed in detail in the full report include culture, governance, teams and leadership and how these interact within any organisation aiming to succeed in the world context of growing complexity.
Conversations during the production of the new report have coalesced around the concept of ‘systems thinking’. The ‘system’ is defined as ‘a collection of elements that are inter-connected and fulfil a certain purpose or function’. ‘Systems thinking’ is using understanding of the system like the investment industry or an individual asset owner to explain trends and develop solutions that work holistically.
The new report presents the concepts of total portfolio approaches (TPA – whole of fund management) and 3D investing (optimising risk, return and real-world impact) as system thinking applications to investment processes. Currently, 35 per cent of the organisations in the study have adopted TPA, with a further 54 per cent moving in that direction. And 65 per cent embrace 3D investing.
