The big macro changes that have taken place over the last year require a rethink and action from investment professionals.
If we think about how investment risk changed in 2020, we can’t of course ignore the impact of COVID-19, but another risk has simultaneously been brought more into the spotlight – climate risk. That is, the physical, transition, legal and reputation risks associated with climate change and the growing recognition of the need to move to a lower carbon economy.
Climate risk is increasingly material to pension funds, both through asset holdings and liabilities, but also in relation to a sponsor’s covenant and the attitudes of members who may have to live with the physical impacts of climate change. Disclosure requirements are also multiplying.
We continue to work with clients to evolve their governance to cover climate risk, carry out scenario analysis and better incorporate climate and sustainability metrics into their existing investment processes. We also propose the climate equivalent of pension scheme financial journey plans - carbon journey plans. Given proposed regulatory deadlines, larger funds need to be starting on that journey sooner rather than later.
Inclusion and Diversity has also changed how we think about investment in 2021. At Willis Towers Watson, we believe diverse teams lead to better long-term outcomes, and we’ve spent the last few years engaging with the industry and evolving our process to better incorporate culture and I&D. We believe having a strong culture is a necessary ingredient for success and tied to this is having a strong diverse and inclusive culture, to not only create but maintain robust decision making. We’ve witnessed numerous situations where poor culture and weaker I&D has negatively impacted a fund’s success.
At Willis Towers Watson we can help asset owners examine a portfolio’s diversity, based on the ethnic and gender diversity of a product’s investment team and firm ownership.