A stronger focus on systemic risks needed for resilient portfolio returns

A stronger focus on systemic risks needed for resilient portfolio returns

New Report identifies the importance of systemic stewardship

 

7 May 2025

At UKSIF’s Spring Conference in Edinburgh, UKSIF, Scottish Widows and Canbury have published a new report outlining the rationale for an enhanced focus on systemic risk in financial services with a clear framework for action. 

The report – ‘Systemic risks: A framework for portfolio resilience’ – demonstrates the importance of systemic risks, which are frequently not addressed effectively in the market. Systemic risks are un-diversifiable risks that can impact entire markets or economic systems through complex interconnections, potentially triggering chain reactions across multiple sectors and disrupting overall market growth. Such risks include climate change, nature and biodiversity loss, income inequality, artificial intelligence, geopolitics and trade wars.

Eva Cairns, Head of Responsible Investment at Scottish Widows highlights:

“For diversified institutional investors with long time horizons, the report emphasises that overall market growth is the primary driver of investment returns. As such it is vital that systemic risks with wide-ranging impacts across markets are addressed to build more resilient portfolios and also contribute to a more sustainable world for pension savers. To achieve this, we need to engage across the wider system that corporates operate in.”

The report highlights that exposure to overall market performance (beta) is the primary driver of investment returns. As such, for all investors – but especially for diversified institutional investors with long time horizons – it is vital that systemic risk identification, management, and stewardship is practiced across portfolios. However, at present, such risks are not commonly addressed as part of standard asset management approaches to stewardship. By embedding systemic risk management as part of investment objectives and aligning teams, asset owners can enhance portfolio resilience and potentially have a positive impact on sustainability outcomes, too.

James Alexander, Chief Executive of UKSIF said:

“As this new report makes clear, pension funds and other asset owners are amongst the very few truly long-term actors in the economy, meanwhile asset managers’ approaches to systemic risks are often insufficient. To protect long-term returns, it is vital that that the whole industry take systemic risks more seriously and asset owners recalibrate their focus towards these issues.

“This includes engaging with governments, highlighting the impact that systemic issues are likely to have on portfolio values, and considering systemic risk and the development of sustainable markets at all levels of decision-making.”

 

Notes to Editors

The full report is available here.

This publication has been commissioned by UKSIF and Scottish Widows. UKSIF and Scottish Widows provided input during the development of the research scope and objectives but has not influenced the findings or recommendations.

The research is based on a qualitative analysis combining over 20 interviews, a roundtable discussion, and a literature review. The interviews and roundtable discussion covered key topics including defining systemic risk, challenges in addressing systemic risks, and the roles of different stakeholders. Participants included investment and stewardship experts representing a diversity of asset owners, asset managers, NGOs, consultants, and academia. The literature review examined four main areas: frameworks and background to systemic risk and systems-thinking, evidence of beta and its relationship to portfolio returns, market mis-valuation of systemic risks, and approaches investors are taking or could take to address systemic risks.

About Scottish Widows

Scottish Widows was set up in 1815 to take care of women and children who lost their fathers, brothers and husbands in the Napoleonic Wars, taking its name after the people it was founded to look after. Now more than 200 years on, Scottish Widows look after over 10 million customers across the UK. Today Scottish Widows’ commitment is still the same – to help people plan for their financial futures.

Scottish Widows’ product range includes workplace and individual pensions, annuities, life cover, critical illness, income protection as well as savings and investment products. Customers can access products and services through Independent Financial Advisers, directly, and through all Lloyds Bank, Bank of Scotland and Halifax branches.

About UKSIF

UKSIF exists to bring together the UK’s sustainable finance and investment community and support its members to expand, enhance and promote this key sector. UKSIF’s work drives growth and new opportunities for members as global leaders in the sustainable finance industry.

UKSIF represents a diverse range of financial services firms committed to these aims, and 300+ members, managing over £19trn in assets under management (AUM), include investment managers, pension funds, banks, financial advisers, research providers, NGOs, among others.

UKSIF and its members have been hugely active in, and supportive of, efforts to promote the sustainable finance agenda and worked closely with policymakers and others to find new ways to overcome the barriers to the growth of sustainability and deliver progress towards decarbonisation of the economy.

About Canbury Insights

Canbury Insights is a sustainability consultancy with expertise in stewardship, climate change reporting, environmental science, sustainability, corporate finance, and public policy. Canbury leverages the latest AI technologies to provide clients with a full service of sustainability support – from source data through to client reporting. Canbury takes pride in providing bespoke advice that meets clients’ needs. Canbury works with companies, investors, and NGOs.