We believe good governance adds value to investment programs and that this is especially true during market corrections and crises. This paper evaluates how large, diversified asset owners are applying their governance policies to the current pandemic-driven crisis associated with COVID-19. Our thesis is that leading asset owners are finding ways to pursue attractive risk-adjusted investment returns, while also taking investment actions to help mitigate and address the impact of the pandemic.

 

Specifically, the World Economic Forum and Mercer recently completed the first part of a multi-year investigation1 into investment and governance practices regarding global systemic risks. The framework created during this investigation can be applied to the COVID-19 pandemic. 

 

Governance Considerations to Navigate a Market Crisis


The World Economic Forum Global Risks Report 20202 highlights the most significant risks faced by the world today. From this report, we focus on six key global systemic risks identified as most relevant to long-term investors. These six risks have varying importance to different asset owners based upon each fund’s objectives, policy mandates, capital adequacy and governing structures.


Climate change

Ability for governments and businesses to address climate change, protect populations and adapt.


Water security

Exposure to declining quality or quantity of fresh water, affecting human health or economic activity.

Geopolitical stability

Implications of rising global inequality, populism, protectionism, interstate conflict and threats to free trade.


Technological evolution

Risks and opportunity associated with technological advances, inadequate infrastructure and networks, cyberattacks.


Demographic shifts

Implications of ageing populations globally, demographic imbalances between rapidly ageing regions and those entering demographic transition, and impact of migration.


Low and negative real long-term interest rates

Implications on monetary policy and return requirements for investors and stakeholders of sustained near zero or negative real long-term interest rates.

In this context, the Navigating a pandemic-driven market crisis report  has two objectives:

 

  1. Evaluate the usefulness of governance strategies developed to address more gradual but equally destabilizing systemic trends in addressing the COVID-19 pandemic-driven market crisis.

  2. Consider practical investment actions by long-term investors that support economic recovery and help generate attractive risk-adjusted returns. We reference such investments as “transformational”.

During a crisis, reliable governance policies should address shortcomings in an investment program’s implementation with forward-looking strategy, enhancing decision-making and collaboration of key stakeholders.

1  World Economic Forum, Transformational investment: Converting Global Systemic Risks into Sustainable Returns, May 2020.
2 World Economic Forum, The Global Risks Report 2020, 15th Edition, 2020.

 

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This is an updated version of the previously published report updated as of 7/16/20

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