A solid assessment of the external and internal context in which the strategy will be developed is needed to provide a strong, common point-of-departure for the process and ensure that discussion between all relevant parties (the board and executives in particular) are sufficiently based on facts to be fruitful. It is also important to assess how the context may change in the short, medium and long term.

The context may vary widely for different types of asset owner – defined benefit schemes, defined contribution schemes, insurance firms, foundations, endowments, etc. – which face differing liabilities (e.g. long versus short), regulatory context, obligatory solvency/coverage ratios, asset and liability management, etc.

Topics to consider

External fundamentals assessment

Consider how these systemic developments (and others) will influence your portfolio in the short, medium, and long term, anticipate how stakeholders could react to these developments (e.g. beneficiaries/customers, employees, competitors, society at large) and consider how the impacts will vary by investment type e.g. asset class, geography, industry.

  • Demographics (e.g. aging, millennials)

  • Transparency demand (e.g. labour, tax, corruption, traceability)

  • Consumer preferences (e.g. digital, sustainable products and services (e.g. fair-trade))

  • Individuality vs community (e.g. personalised vs standardised, sharing economy)

  • Poverty/inequality

  • Food security

  • Human/labour rights

  • Diversity

  • Other…

  • Big data

  • Social media

  • Cloud computing

  • Connected world (e.g. mobile, internet of things)

  • Cyber security

  • Robotics (e.g. industrial, self-driving vehicles, drones)

  • Renewable energy technology

  • Biosciences

  • Artificial intelligence

  • Other…

  • GDP/productivity (by nation, by industry)

  • Rise of emerging markets

  • Capital flows

  • Exchange rates

  • Inflation/deflation

  • Market performance/returns

  • Market volatility over time

  • Market efficiency

  • Market risk and tail-risk

  • Asset class availability

  • Financial-economy effects from environmental impacts (e.g. resource scarcity) and other ESG concerns likely to become important in the markets

  • Other…

  • Global warming/climate change

  • Resource scarcity/disruptions (energy, water, food, land)

  • Deforestation

  • Pollution (air, water, soil)

  • Biodiversity

  • Recycling/cradle-to-cradle (towards circular economy)

  • Materiality of environmental risks and opportunities for markets

  • Other…

  • Geopolitical shifts

  • Increased regulations and soft law resulting from societal concerns (e.g. low-carbon goals, GMO concerns, health/safety, response to financial crisis)

  • Changes in tax policies and tax transparency regulations

  • Changes in governance regulations

  • Central bank strategies and involvement

  • Fragmentation/consolidation waves in politics and trade (e.g. TPP, EU expansion/withdrawals)

  • Other…

  • What are more dramatic/disruptive shifts in trends that could occur broadly in the economy (e.g. dramatic lengthening in human lifespan, increasingly sophisticated artificial intelligence)? What would be the impact?

  • Where and how is responsible investing manifesting most?

  • What are the in-depth trends in themes such as global/regional/country inequality (e.g. income, opportunity, justice)? What trends are already being impacted by the investment community?

  • Are the Sustainable Development Goals (SDGs) being considered by companies? To what extent do they influence behaviour?

  • Other…

Internal assessment

It is also important to understand your organisation’s position in the market, and your internal capabilities.

  • Is there a clear investment strategy already?

  • What is the position relative to financial obligations, such as the asset and liability management profile? What liquidity requirements do you have? What other needs does the organisation have to maximise assets available to meet liabilities in the short, medium and long term?

  • What is the organisation’s general position in the market (e.g. size relative to others, asset allocation)?

  • What capabilities and capacity does the organisation have to gather data and evaluate trends and investments within the organisation (vs. relying on the off-the-shelf analysis)?

  • Are there sufficient in-house/available-to-hire investment/portfolio managers with deep understanding of the market and of sustainability in general?

  • What is the operating model and organisation structure?

  • What is the incentive structure? How is it aligned to the organisation’s long-term goals?

  • What potential new relationships and/or disruptions in the investment value chain are expected?

  • What is your transparency process?

  • What is the organisation culture and how easy will it be to evolve it? What is the track record on implementing changes in the organisation?

  • Is there a clear position regarding impact investing?

  • What access to/presence in relevant networks does the organisation have to source investment opportunities that will differentiate it?

  • Other…

  • What do you consider the responsibility and the purpose of the asset owner you are working at? Do you take a systematic/scientific or intuitive/heuristic approach to decision making?

  • Do you expect resources to become more abundant or more scarce?

  • Do you believe your industry is facing a sustained period of disruptive change or a stable future?

  • What do you consider the main incentives driving individuals in the investment market? Is this aligned with what’s important to you?

  • Do you consider it to be a responsibility of any business to contribute solely/primarily to shareholder value or to contribute value more widely, e.g. to other stakeholders?

  • How do you see your own personal responsibility for wider value creation? Do you think this deviates from the opinion of other key players?

  • What would success look like for your organisation 10-15 years from now?

  • How do you view stewardship?

  • Other…

Actions and roles

  1. Project lead ensures exhaustive list of:
    1. trends to be examined and sources to be checked;
    2. organisational assessment points available and gaps to be filled;
    3. stakeholders to interview on their personal investment convictions.
  2. Project team collect reports on macro trends, to project the impact of these trends on portfolios, and assess internal capabilities of the organisation to address these issues.
  3. Project sponsor holds initial meeting with the board, executives and project lead to assess current strategy, discuss systemic developments including potential influence on the risk/return profile and discuss further/future considerations.
  4. Project lead conducts interviews with board members/trustees and executives on their personal investment convictions.
  5. Project lead/team may engage (such as through surveys or focus groups) with wider stakeholders (such as beneficiaries/customers) to further identify inputs on external factors (including ESG) that may influence desired investment outcomes.
  6. Board may engage with wider stakeholders to develop their own personal investment convictions, and potentially ask wider stakeholders about theirs.
  7. Project sponsor holds additional workshops with the board/trustees, executives and project lead to present and share initial findings, and educate on relevant issues (such as responsible investment) if required.

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    How to craft an investment strategy

    March 2018