Systemic risks: A framework for portfolio resilience

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.

Systemic risks matter because:

– For diversified institutional investors with long time horizons, overall market growth (Beta) is the primary driver of investment returns

– Markets may misprice or not price systemic risks

– A complete interpretation of fiduciary duties includes responsibility for maintaining a well-functioning market

And so, UKSIF, in partnership with Scottish Widows and Canbury, are delighted to launch a new report responding to the growing recognition of the challenges systemic risks present to investors and the need for wider investment professionals, beyond stewardship teams, to consider them.

The report considers:

– Why systemic risks are particularly important for asset owners to consider

– How asset managers can tackle these risks despite operating within short-term performance horizons

– The practical steps UK-based asset owners can take to address systemic risks

By embedding systemic risk management as part of investment objectives and aligning teams, asset owners can enhance portfolio resilience.

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.

 

Read the full report here.

Read the press release here.