The landscape for institutional investing in 2018: Perspectives of institutional investors
The 2018 Argentina G20 Presidency requested the World Bank to organize a high-level G20 Investor Forum focused on institutional investors (pension funds, insurance companies, sovereign wealth funds, asset managers). The Forum will take place on November 29, 2018, in Buenos Aires.
The Forum will bring together leaders from the public sector and the global investment community to explore how their combined power could contribute to sustained global economic growth and increase the flow of long-term sustainable investments to where they are needed most. It is hoped that the Forum will build strong momentum to support collaboration to address areas of shared interest, concern, and opportunity.
As part of preparing for the Forum, the World Bank Group (WBG) conducted semi-structured interviews with senior executives – mostly chief executive officers and chief investment officers – in 34 global institutional investors, soliciting their views on the current operational and investment environment; strategic priorities going forward; and actions required to scale up investments in sustainable, long-term projects, particularly investments in infrastructure.
The major topics covered were (i) current perceptions regarding today’s economic and investment environments; (ii) mega-trends shaping existing and future investment strategies; (iii) sustainable investing along a number of dimensions; (iv) infrastructure investing; (v) investing in emerging markets; (vi) the potential role of the WBG and, by extension,other international financial institutions (IFIs); and (vii) their guidance on how to make the Forum a success.
Given the geographic diversity, number, and level of seniority of the interviewed executives, we believe that these inputs can be considered a good reflection of views widely held by the global investment community. A key finding from the interviews was the significant degree of consensus among global investors on what were the principal concerns, opportunities, and actions needed.
There was a strong consensus in the interviews regarding the current investment landscape. Nearly all the executives agreed that the extraordinary international macroeconomic policies – in particular, monetary policies – and regulations instituted in response to the 2008 global financial crisis are still in place, and are a major factor shaping today’s investment environment.
While these measures were largely effective in containing the crisis, they also continue to have unintended consequences affecting markets and the global business environment. Financial regulations (such as Solvency II and Basel II/III), in particular, were cited as potentially disincentivizing long-term investments, especially in infrastructure, due to their capital adequacy requirements and liquidity risk standards.
Investors shared a concern that once central banks return to ‘traditional’, non-crisis and less accommodative policies this could exacerbate economic instability, triggering a potential increase in market volatility and greater fragility of global economy. They also noted that unconventional monetary policy cannot be the solution for the next financial crisis, and appropriate fiscal and economic measure need to be put in place to ensure continued economic growth.
Four categories of mega-trends were seen as creating both risks and opportunities:
environmental (climate change and resource scarcity disrupt supply chains and markets, but also create new investment opportunities, such as in renewable energy technologies);
social (demographic trends shift the distribution of human capital, affect labour markets and the sustainability of existing pension schemes, but also open new markets, while growing inequality presents increasingly serious systemic risk);
technological (disruptive technologies in the short to medium term threaten to eliminate traditional jobs and sources of income, but in the longer term contribute to productivity improvements and create new opportunities); and
geopolitical (political polarization and disruption of the multilateral world order). Executives noted that public policy and market solutions designed to address the challenges raised by any of these trends must simultaneously consider their consequences for other ones, to optimize the overall positive impact on the “state of the world.”
Interviewees identified the advancement of sustainable, long-term investing, and investing in infrastructure, as important areas of shared interest and opportunity. Such opportunities can be enabled, they added, by the collective and coordinated action of the global investment community, multilateral institutions, and governments, through channels such as the G20.
There is growing support for sustainable investing, which was seen as having the potential to lower financial and reputational risks, improve returns, and provide long-term revenue streams. The adoption of sustainable investing is expected to increase, and it has the potential to become an investment market component in the short to medium term, and a potential standard for a significant share of investments in the medium to long term, reflecting shifts in the standards and values of asset owners, investors, and consumers. Coupled to this support was a growing interest in long-termism, a natural corollary to sustainable investing, since its benefits play out over years, not days or months.
The investors noted that shifts toward sustainable investment practices – including the adoption of environmental, social, and governance (ESG) principles in investing – are driven in part by consumers and employees who are increasingly reluctant to work for, or buy from, companies with poor ESG practices. Another important driver is companies’ growing recognition of the system-level implications of their investment decisions. Increased media attention and global advocacy through international political platforms such as the Sustainable Development Goals support this trend, making it increasingly difficult for investors to turn a blind eye to the systemic and sustainability impacts of their investment decisions.
This report, which was based on a summary of conducted interviews, was prepared by Eric Bouyé, World Bank; Robert Eccles, Saïd Business School, Oxford University; Svetlana Klimenko, World Bank; and Daria Taglioni, IFC.