How investors are overcoming systemic risks and setting the pace for others to follow

(Credit: Unsplash)

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Jonathan Cross, Project Fellow, Mercer


  • In 2021, asset owners ranked climate change as the top systemic risk affecting their portfolios and organizations.
  • A study conducted over three years by the World Economic Forum and Mercer shows that pace-setting investors follow three steps to overcome systemic risks.
  • A Climate Benchmark tool was developed out of the findings for other investors to asses their performance and integrate these steps into their own investing practices.
  • The paper also provides the solutions already implemented to overcome the four most common obstacles to climate investing.

Asset owners around the world are moving fast to adapt investment processes to respond to climate change related risks and opportunities. In a recent study the World Economic Forum and Mercer have identified specific activities that pace-setting asset owners use to tackle the most common challenges that impede climate investing. These challenges include:

1. Defining and implementing a transition roadmap;

2. Measuring achievement and success;

3. Engaging investee companies actively and effectively; and

4. Defining climate reporting metrics by asset class and manager.

Even the most sophisticated investors struggle with the myriad of activities required. By focusing on the investors who are pioneering this field, the research is accelerating the wider investment community’s advancement with respect to climate investing. Dozens of asset owners have already utilized a climate benchmark tool to measure their activities against peers around the globe. This has helped to uncover their shortcomings and to enhance their vision, governance, and implementation of activities integrate climate change into their investing strategies.

Three steps investors follow to overcome systemic risks, such as climate change

Global asset owners and managers confront the challenges of transformational investing in pursuit of absolute and risk-adjusted returns on a daily basis. The World Economic Forum and Mercer conducted a study over three years to find out how investors address the most prevalent challenges associated with climate change and geopolitics. The focus was specifically how investors apply vision, governance and implementation activities to translate these challenges into investment opportunity.

The three steps are:

1. Become familiar with the advanced practices of investors around the globe that already have addressed climate investing.

2. Uncover current shortcomings by benchmarking current practices against the activities of advanced practitioners.

3. Refine the vision, governance and implementation processes that integrate climate investing factors into ongoing investment decision-making, consistent with strategic objectives, stakeholder requirements and fiduciary duties.

The research found that asset owners with well-developed vision, governance and implementation structures have a clear sense of “who they are”, allowing them to react decisively in response to systemic risks.

How to benchmark progress

The research identifies more than 80 investment-related activities that integrate climate factors into investment decision making. By translating advanced practices into a peer-to-peer climate benchmark, the asset owner community can use the tool to assess their current activities.

Illustrative peer benchmarking output of Climate Benchmark across 10 categories of activity (1 = not started; 5 = fully developed). Image: Mercer Climate Benchmark tool

Benchmarking of several dozen asset owners solidified findings from the tool and validated the top climate investing challenges that investors face. The Pacesetters: Setting the Tempo of Advanced Climate Investing paper provides the solutions already implemented to overcome the four most common obstacles to climate investing.

How to overcome the top four challenges impeding climate investing

1. Defining and implementing a transition roadmap

Uncertainty over the pace and nature of the transition to a low- or no-carbon global economy presents challenges to investors seeking to maximize risk-adjusted returns. Transition roadmaps translate the inherently complex interrelated challenges of decarbonizing the global economy into applicable investor steps that address asset owners’ unique objectives and stakeholder requirements. Roadmap development often serves to unify organizational beliefs and produces forward-looking policy and governance action steps.

2. Measuring achievement and success

Standard investment performance benchmarks are ineffective in measuring the results from climate investing activities. Measuring achievement and success comes from understanding the advanced climate practices of other investors as well as learning how they define, monitor and report climate-related investment outcomes. The climate benchmark captures the activities that integrate climate investing into investment decision making. A commitment to these activities leads to material adjustments in both measurement processes and how to successfully pursue climate investing practices.

3. Engaging investee companies actively and effectively

Across the majority of sectors, the decision to engage or divest has become increasingly nuanced. Asset owners, committed to enhancing long-term value across investee companies, undertake the full range of stewardship activities available to them. Key characteristics of successful programmes, regardless of whether these are carried out in-house or delegated to external managers, include being proactive in identifying and engaging companies on material risks, rather than reactive, alongside a focus on quality of engagement over quantity.

4. Defining climate reporting metrics by asset class and manager

Challenges to metric development include a lack of standardization, disclosure and awareness of best practice. Asset owners today are actively integrating available data into investment decision making. An awareness of the financial materiality of data together with any associated limitations is key to tracking progress against transition roadmaps, manager performance, and commitments.

To find out more about the approaches asset owners are taking in these areas, read our accompanying report – Pacesetters: Setting the Tempo of Advanced Climate Investing.

Learn more about the World Economic Forum’s work in Shaping the Future of Financial and Monetary systems.

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