Climate change and artificial intelligence seen as risks to investment asset allocation, finds new report by BNY Mellon Investment Management and CREATE-Research
Research outlines impact on asset allocation as a result of these 'supertanker' trends.
16 Sep, 2019, 08:00 ET
NEW YORK, Sept. 16, 2019 /PRNewswire/ -- Two secular forces or 'supertanker' trends, climate change and artificial intelligence (AI), are reshaping the future of investing, finds a new research study launched today by BNY Mellon Investment Management and CREATE-Research.
89% of the institutional investors ("investors" or "respondents"), with combined assets under management of approximately $12.75 trillion, that took part in extensive and structured interviews as part of the study regard the two supertanker trends as investment risks. Almost all (93%) view climate change as an investment risk that has yet to be priced in by all the key financial markets globally, while over 85% view AI as an investment risk that could potentially provoke societal backlash as well as geopolitical tension.
The report, Future 2024: Future proofing your asset allocation in the age of mega trends, examines how climate change and AI are perceived by investors globally, the investment issues and solutions they are giving rise to and the potential impact of these supertanker' trends on asset allocation approaches and the asset management industry.
AI and climate change: risk or opportunity?
Both AI and climate change are viewed as materially important factors by investors.
Over half (57%) of the respondents view climate change as a risk and an opportunity; 36% view it as a risk only and 7% view climate change as an opportunity only. Investment specific challenges related to climate change focus on areas that are unknowable, requiring judgemental calls about the future. These include:
- Slow progress on carbon pricing – envisioned under the Paris Agreement – is leaving investors guessing at what point draconian governmental action will become inevitable;
- Dilemma on the future of stranded assets, with investors weighing up whether to mitigate investment risks now or later at potentially higher costs;
- Engagement with carbon emitters is more difficult for investors in fixed income than equities, due to fewer opportunities to engage with companies via voting rights or annual general meeting (AGM) attendance;
- Question marks on whether environmental, social, and governance (ESG) investing is a risk factor now or will be in the future, as benefits are already captured with other factors such as quality and low variance.
In response to the challenges arising from climate change, investors are factoring in the potential for draconian measures, ensuring they have intensive engagement with companies, increasing investment in green bonds and accepting ESG as a risk minimizing tool.
Half (52%) of the investors surveyed, who stated AI was a risk, also regarded it an opportunity, whereas 33% saw it as only a risk and 7% regard it as an opportunity only1. The rise of AI is seen to create four investment specific challenges:
- Corporate lifecycles will get shorter as AI creates winners and losers, as shown by the impact of the earliest versions of the iPhone on Nokia in 2007;
- Sectoral boundaries will blur, as AI reconfigures entire products, as seen with Tesla, which straddles multiple sectors, causing valuation issues;
- Onshoring of manufacturing activities will diminish the prospects of emerging economies, with 3D printing shifting the geographical centers in global supply chains;
- Intangible values of companies will be enhanced in ways that are hard to measure for asset valuation purposes.
In response to these challenges, investors are increasingly mixing active and passive investment strategies, focusing on idiosyncratic risk in portfolios, targeting emerging innovation leaders and blending hard and soft metrics in their analysis.
Matt Oomen, global head of distribution at BNY Mellon Investment Management, commented: "The best opportunity is rarely the most obvious one. For investors caught up in the day-to-day maelstrom of constant change, choosing the right path can be difficult. Compounding these challenges are large secular trends, such as artificial intelligence and climate change. Already we are witnessing a change in the way markets operate in response to these two supertanker trends. These will be the defining challenge not just for the current generation of asset managers and investors, but for generations to come."
Changes afoot for asset allocations and the investment industry
Secular themes such as AI and climate change are also key factors driving changes in asset allocation. Overall, the study indicated that new future allocations may favor private markets more than public ones, as the search for uncorrelated absolute returns intensifies. Private debt may be used to support young start-ups, while private equity may be relied upon to capitalize on corporate restructuring driven by AI. The report found that investor allocations to private markets are currently between 19 - 31% but are expected to rise.
Headlong growth in passive funds has been observed in the past decade, with ETFs and smart beta accounting for 20 - 40% of interviewed investors' portfolios and it is also an area expected to rise in the next decade.
Mitchell Harris, chief executive officer of BNY Mellon Investment Management, said: "The study highlights two shifts that stand out within asset allocation – the move from active to passive and from public to private markets. Both are indicative of the reincarnation of the old core-satellite model. We believe passive will be raising their share of core assets, while active will be focusing on satellites that dominate either inefficient or illiquid markets. The separation of alpha and beta is structural but the two styles of active and passive investing will remain interdependent."
The research also explored several foundational trends that are reshaping the global asset management industry, such as the increased personalization of retirement planning, and the emergence of millennials and women as growing client segments. In addition, flows into retail and wealth channels are increasing as defined benefit plans advance into run-off phase, and one-stop-shop financial planning is set for take-off with the proliferation of smart phones and 5G networks.
Amin Rajan, Project Leader at CREATE-Research, commented: "Newly emerging investor segments see a clear distinction between product alpha and solution alpha – beating the markets via stock picking versus meeting investors' predefined financial goals and personal values. Today's asset management industry may well be unrecognizable by the end of the next decade in the face of mega trends. Success is about navigating through the fog to create a new future, far removed from old connections and causality."
Notes to editors:
About the research
The report asks:
- How are artificial intelligence and climate change currently perceived in terms of their future opportunities and risks?
- What specific investment issues do they give rise to and what solutions are being or will be adopted?
- In the process, how are the asset allocation approaches changing and what have the outcomes been so far?
- How will the asset management industry be reshaped, as it advances into the age of mega trends?
The method used to answer the questions relied on two strands: a literature survey of about 400 widely respected research studies; bolstered by in-depth, structured interviews with 45 CIOs, investment strategists and portfolio managers among pension plans, asset managers and pension consultants in 16 countries. They are Australia, Canada, China, Denmark, Finland, France, Germany, India, Japan, Singapore, South Korea, Sweden, Switzerland, the Netherlands, the UK and the US.
BNY Mellon Investment Management is one of the world's largest investment managers, and one of the top U.S. wealth managers, with US$1.8 trillion in assets under management as of June 30, 2019. The firm is built around delivering to investors a "best of both worlds" approach: the expertise and world-class capability of our individual investment managers, wedded to a global geographic footprint, and guided by an unshakable commitment to financial stewardship. BNY Mellon Investment Management encompasses BNY Mellon's affiliated investment management firms, wealth management services and global distribution companies.
BNY Mellon Investment Management is a division of BNY Mellon, which has US$35.5 trillion in assets under custody and/or administration as of June 30, 2019. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Additional information is available on www.bnymellon.com. Follow us on Twitter @BNYMellon or visit our newsroom at www.bnymellon.com/newsroom for the latest company news.
CREATE-Research is an independent research boutique specialising in strategic change and the newly emerging asset allocation models in global asset management. It undertakes major research assignments from prominent financial institutions and global companies. It works closely with senior decision makers in reputable organisations across Europe and the U.S. Its work is disseminated through high profile reports and events that attract wide attention in the media. Further information can be found at www.create-research.co.uk.
Unless otherwise specified herein, all information sourced by BNY Mellon as of September 16, 2019. This press release is qualified for issuance in the United States, UK and Europe and is for information purposes only. It does not constitute an offer or solicitation of securities or investment services or an endorsement thereof in any jurisdiction or in any circumstance in which such offer or solicitation is unlawful or not authorized. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. This press release is issued in the U.S by BNY Mellon Securities Corporation, a registered broker-dealer and a BNY Mellon Company, 240 Greenwich St, New York, NY 10286, and in the UK and Europe by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA) to members of the financial press and media and the information contained herein should not be construed as investment advice. Registered office of BNYMIM EMEA: BNY Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England no. 1118580. Authorized and regulated by the Financial Conduct Authority. A BNY Mellon Company.
References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations.
1 8% viewed it as neither a risk nor opportunity
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