Governance is key to addressing and mitigating global systemic risks while pursuing returns, says Mercer

A new report from Mercer examines how large 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 Covid-19 pandemic through investment governance.

The Covid-19 – Investment Governance and Strategy to Navigate a Pandemic-Driven Market Crisis report highlights how the pandemic has had one of the most significant impacts on the global economy in the last century – affecting liquidity, market volatility, valuation adjustments across asset classes and significant changes to forward-looking return expectations for many asset classes. It has also driven down nominal and real interest rates and lowered oil prices, and it has damaged the fiscal solvency of some governments and the private sector.

The report is linked to Mercer’s ongoing, multi-year “Transformational Investment” collaboration with The World Economic Forum (WEF), which explores investment and governance practices for global systemic risks. These global system risks confront our global economy, society and the planet, and include climate change, water security, geopolitical stability, technological evolution, demographic shifts and zero or negative real long-term interest rates. Related to this effort, the WEF recently issued “Transformational Investment: Converting Global Systemic Risks into Sustainable Returns,” which provides new insights to help asset owners address the long-term impact of non-traditional investment risks and opportunities.

Through this collaboration, the WEF and Mercer provide institutional investors with a six-step governance and decision-making framework to pursue attractive risk-adjusted returns. Mercer’s white paper demonstrates how the framework is applied to the pandemic.

These principles include:

• Understand the overall impact on the funding entity, objectives & beneficiaries.

• Collaborate with similarly situated organizations who are concerned about the same risks & opportunities.

• Design governance, policies, delegation and accountabilities for material systemic risks.

• Invest to manage the portfolio’s exposure to the global systemic risk.

• Transform through driving investment strategy that aims to deliver change.

• Monitor and revisit. Apply learnings to improve policies and processes.
In this context, Mercer’s paper has two objectives for institutional investors:

1 Evaluate governance strategies developed to address systemic risks, in terms of addressing the COVID-19 pandemic-driven market crisis, and

2 Consider practical investment actions by long-term investors that support economic recovery and generate attractive risk-adjusted returns. Investments that support economic recovery and resurgence are considered “transformational.”

“As illustrated by the Covid-19 pandemic, our economy, society and planet face numerous long-term, global systemic risks, which need to be mitigated,” says Rich Nuzum, Global President of Mercer’s Investments and Retirement business. “As our report shows, institutional investors have the ability to respond to these challenges and continue to seek positive investment outcomes, while mitigating the effect of these systemic risks. This is especially true when it comes to governance, as sound and robust investment practices can benefit the economy and broader society through periods of market volatility and economic uncertainty.”