Stockholm (NordSIP) – On December 1st, NordSIP attended the “Sustainable Investing at an Inflection Point”, a webinar hosted by the CFA Institute to discuss its recent “Future of Sustainability in Investment Management: From Ideas to Reality” report.
The event was moderated by Elizabeth Corley, who was CEO of Allianz Global Investors, initially for Europe and then globally, from 2005 to 2016. The panel counted with the participation of Margaret Franklin, President and CEO of the CFA Institute; Hiro Mizuno, CIO of the Government Pension Investment Fund of Japan (GPIF) between 2015 and 2020, and Roger Urwin, global head of investment content and advisory director at Towers Watson.
The report is informed by the views of more than 7,000 industry participants, including 3,500+ retail investors, 920+ asset owners, and 3,050+ investment practitioners. Research was conducted via surveys and virtual roundtables across 31 markets globally.
The webinar echoed the argument of the analysis that the financial industry has matured and is slowly embracing sustainable investments. “There is a growing recognition that some ESG factors are economically material, especially in the long term, and it is, therefore, important to integrate material ESG factors in investment decisions,” the study says.
Looking ahead, the report considers the future of finance will be dominated by the Influential and growing demand for sustainable investments. It will also be Driven by the business and investment models of asset owners and asset managers. To Enable the transition to sustainable investing, organisations will have to recalibrate their collective technological and human capabilities to develop the necessary synergies. Finally, all these factors will have to be galvanised into Action to make the necessary change take place in across the whole investment industry.
The most salient features of the discussion, and two of the many themes discussed in the report, appeared to be the important combined power of a paradigm shift from financial models inspired by classic physics to systems theory and the important role model provided by universal investors such as GPIF.
A Paradigm Shift
According to the report, and in the context of the actions needed going forward, investment professionals need to understand the main features of systems theory and use this thinking when considering sustainability topics. During the online discussion of the study, Urwin reiterated the need for this action. “We need to solve data issues and a focus on systems,” he said, noting that our models should be better at “reflecting pulls and pushes, jumps and tipping points. This way of thinking explains things better. We are a point of strategic inflection when sustainability is becoming more than it was before.”
This elaborated upon the idea described in the document that “investment professionals should seek to understand the main features of systems theory and make sure that this thinking is present when considering sustainability topics. Examples of this theory include the multiplicity of factors, reflexivity, and nonlinear pathways. The dominant paradigm taught in mainstream investment theory has been influenced by an equilibrium model of prices with rational investors. In contrast, systems theory supports the idea that states of equilibrium will be temporary and that investors are motivated by a range of considerations, not all of them rational.”
Urwin went on to describe 2020 as “a systems issues year”, first with climate change issues, but subsequently with regards to COVID-19 and social justice protests as well. “Systems theory is more than just an extra discipline to be studied; it is as much a way of thinking and communicating that needs a cultural grounding,” the study explains. “The key principle is that there are multiple interconnected factors that drive the investment ecosystem that need to be recognized. This again calls for balance — the balance to our thinking that does not seek to oversimplify complex elements.”
The discussion highlighted the experience of universal owners such as the Government Pension Investment Fund of Japan as a crucial template towards a systems approach to investing. According to the report, Universal owners are asset owners whose investment portfolios are so large that they end up owning a non-negligible share of the entire economy and financial market.
The study argues that this allows universal owners to “recognise that the future value of an investment portfolio is affected more by overall economic performance than by the return on individual assets or sector exposures.”
Mizuno, drawing on his experience integrating ESG at GPIF, described the importance of broader considerations. “When I started and considered how we could be more sustainable, I concluded that paying attention to what we own is not enough. We need to pay attention to other markets because that’s a reflection of what is happening in the real world.”
“We are gradually coming to the realization that a more holistic understanding of fiduciary duty is critical to preserving capital over the long-term,” Mizuno is quoted as saying in the report. “Issues such as climate change or social disruption caused by inequality pose long-term systemic risks that ultimately affect our fund performance, and these risks cannot be hedged away through traditional portfolio diversification,” Mizuno concluded.