In response to the global pandemic and a rapidly changing macro-economic environment, policymakers have been summoned to help stabilise markets. They have struggled to manage the economy, society and environment in a way that affords balance.
“The real experience feels as if we are living in extremes,” says Premal Ranchod, Head of ESG at Alexander Forbes Investments.
Ranchod lists global systemic risks:
- Climate change
- Water security
- Geopolitical stability
- Technological evolution
- Demographic shifts
- Low and negative real long-term interest rates
“These may well have been with us before the pandemic, but are accelerating with pace. In response to the states of flux experienced globally, we believe that regulatory and policy reform will be ushered in, enduring over the decades to come. Clients, trustees, investors and fiduciaries should proceed with eyes wide open, as the days of plug-and-play solutions are numbered. Partnering with specialists will be critical for turbulent markets,” states Ranchod.
According to Ranchod, “Navigating long-term themes allow us to be constructive at managing savings that have the same long-term investment horizon. They have an added benefit of being supportive of local and global regulatory reforms.”
Alternative assets boon
He believes that the alternative assets boon is inevitable and supportive of the systemic risks. “The persistence of low interest rates globally following Federal Reserve banks stimulating economies means that the hunt for yield is upon us.” Ranchod adds, “Research suggests that global revenue projections of asset managers will rise significantly in the next five years, with specialties and alternatives exceeding 50% of the market.”
Private equity is also well positioned to capture secular or non-economically sensitive trends before they are accessible through listed stock markets. Ranchod comments that private equity of tomorrow will be paired with outcomes to achieve increasingly important ESG and impact-related objectives in addition to financial objectives.
The energy sector, in particular renewable energy, remains in focus for investors. “Emerging market populations already make up 65% of the global population and are growing rapidly. This creates considerable demand for the development of infrastructure that must be met sustainably,” states Ranchod.
Survival of the fittest businesses
In this period of business unusual, Darwin’s “survival of the fittest” theory applies to businesses as they face the greatest market uncertainty in the last 80 years. The consolidation of asset management has not been spared in the natural selection outcome.
When raising assets to manage, the following tide is proving a challenge:
- regulatory reform
- compliance costs
- specialist skills (alternatives, ESG, compliance)
- market volatility
The businesses that are fit merge and live to fight another day. Traditional benefits of scale will endure, while small and medium enterprises will require deep but much-needed skill to survive long run economics.
Ranchod suggests, “Investors seeking to mitigate risk should brace for transition.” When meaningful action lags or when matters are of prudential importance for countries, their citizens and a minimum viable life, regulatory reform arrives. In the quest against the climate emergency, a regulatory onslaught in green finance taxonomies from the UK, EU, USA (green new deal) amongst others will lead the regulatory reform of global pensions and investment industry.
“National Treasury’s draft technical paper on sustainable finance taxonomy has been released in 2020, with an update to include social outcomes to arrive in middle of 2021. The Code for Responsible Investment Practices in South Africa (CRISA) has already begun a review process. The Glasgow Climate Summit in November 2021 will attempt to take stock on the commitments made in Paris 2015 in relation to climate change management of risks. The 193 United Nations members, including South Africa, will present a path for a just transition of the economy.”
Corporate reporting practices are firmly under the public microscope. ESG risks and United Nations Sustainable Development Goals (SDGs) outcomes will be required for corporate reporting and holistic portfolio management. Whilst the SDGs have been created with a much broader purpose in mind, they do have relevance for corporate reporting and investments. Fiduciaries will embrace the debate of value (traditional risk and return) against values (purpose) as new pension fund members seeks to understand if their fund will cater for the world they retire into.
Failing to consider ESG issues is a failure of fiduciary duties. Fiduciary 2.0 is the term which Ranchod coined to define the changing responsibility of fiduciaries which includes all participants in the pension fund value chain.
Woke investment professionals
“It’s going to matter partnering with those investment professionals who have a history of experience behind them but are woke enough to embrace long-term challenges loaded with stamina,” concludes Ranchod.