Unsurprisingly at the Thinking Ahead Institute, our futurist streak means at the beginning of every year we like to compile a list of the big themes to look out for. We’re not alone in doing this and would point to the Visual Capitalist blog as a particularly good example with its consensus survey that combines 200+ views.
Of our five big 2021 themes only two feature on the above consensus list, probably due to differences in criteria and beliefs. At the Institute, we believe the investment industry gives too much emphasis to things that are easily measurable, through hard data, and not enough to the most meaningful issues that are captured through soft data. Remember soft data is not soft because it’s weak, it’s because it inevitably lacks precision but may more than compensate with its materiality.
So, our list tries to produce a balance of the two and arrives at alternatives, benchmarks, collaboration, diversity and ESG. In brief, why are these five important?
Alternatives
Given the increasing acceptance that the traditional and iconic 60-40 equities-bonds mix is coming up short, there is growing confidence that this broad asset class (forgive me lumping it into one bucket) is critical to our future. Given the market circumstances there is likely an uptick in the allocations to alternatives. The growth of alternatives assets globally in the last 20 years has been significant, but that growth will be higher if these assets are streamlined and democratised further.
Benchmarks
A mix of data, benchmarks and standards make up an increasing part of the fabric of our industry. They have an enormous and growing significance in helping inform our grasp of the new realities of our complex world. Surprising then that they do not make it into the 200+ consensus, perhaps because it is a ‘how’ subject. We believe the opportunities and pitfalls in benchmarks have never been greater.
Collaboration
The growing appearance of collaboration on the industry’s to-do list reflects the increased preference for and opportunities from team-based and partnership-based endeavour. We see this particularly in the sustainability area where working together directly or through focused industry groups is becoming essential. But we also see wider attempts to unlock cognitive diversity and produce combinations that are more than our individual contributions.
Diversity
The full set of diversity, equity and inclusion is a subject that is full of soft data and it has muscled its way into being top-of-mind because of events and logic. It will likely play a key part of the drive for more emotional intelligence both in our organisations’ workforces and in our investment portfolios. It plays an anchor role in the nexus of organisational purpose, culture and sustainability that is so resonant at present.
Environment, Social and Governance (ESG) factors
ESG is full of soft data and this is arguably what holds it back and may turn out to be its Achilles heel. For the longest time ESG, and particularly sustainability, has been seen as a very slow-moving but unstoppable train that is challenging us, but not always persuading us. To date, inertia and the challenges of dealing with its complexity have been big enough to keep the train in slow-motion. However, circumstances have brought us to a point of strategic inflection, and the pace is really picking up. It is the biggest trend in the consensus forecast, containing as it does the rise and rise of the inequality discussion.
Yes, we came out with a list of A-B-C-D-E. That’s just a lucky break, even I will remember all five.
One final point. What was missed? Is there one for luck? There are dozens of potential candidates but ‘Facts’ comes up trumps, and yes it begins with ‘F’ (that’s a lucky streak now).
Facts sound like hard data but in our polarised world we must deal with facts being increasingly contested. It matters to our industry how the challenges of polarised opinion and democratic legitimacy develop given life’s increasing haze; not helped by an abundance of biases. But in the more controllable backyard of our industry we seem also to be struggling with facts and inferences in a world over-run with data. So, this theme is all about the industry rising to the challenge of over-abundance.
Take all the issues around climate change which call for new perspectives and strategies made up of multiple strands, such as: climate scenarios, the politics around COP26, public policies, technologies, impacts, corporate actions and inactions. What is critical to our industry is that facts, data and information are embedded soundly in the stack of thinking that completes with understanding, wisdom and action. And we don’t yield to the flow of unchecked information and disinformation that is disrupting other areas of society.
Two more questions arise in this regard. Can facts make a comeback and fact-based, evidence-backed, logic-driven work be at the heart of our industry? I think so but we have far to travel.
And can we see the dawn of the truly sustainable firm as a result? I think so but it will take time. So, ‘Facts’ is my candidate for a theme of the decade and one where the work must start now.
At the same time, we need to spend more time on the other five themes and building that thinking stack.
Here are the five themes summarised below.
The five big themes for 2021
Alternatives
Alternative assets fill a fixed-income shaped hole in the asset mix via a shift that holistically pivots the total portfolio strategy
The investment macro is being twisted and, tortured by the impacts of extraordinary monetary policies with investment markets positioned as a transmission channel for, and an after-effect of, monetary policy. The implications of this for the industry are multiple – for investment strategy, the sustainability of long-term investment institutions and the wider societal implications of the role of investing and investment professionals.
Total portfolio approaches and risk budgeting are ideal thought partners in supporting these shifts.
The replacement of the 60/40 equity: bond model is critically needed, for industry sustainability.
Benchmarks
Benchmarks and data surge in a world of few absolutes. This supports better understanding of relative positioning and best practice
The market has had decades of developing disciplines in financial reporting; but only one decade of this development in non-financial reporting. There is huge scope for reporting and investing standards to become better disciplined, consistent and valuable but it will take a highly co-ordinated effort by the large global industry bodies, and stronger disciplines in organisations’ reporting and accountability.
Benchmarking is a growth area to improve accountability.
Data is used in clunky ways and needs stronger strategy, governance and science to deliver to its full potential
Collaboration
Collaboration develops and adds to creativity and innovation, the industry’s lifeblood and moats, helped by the co-opetition model
Our industry has many organisational players. For the industry to progress successfully there needs to be increased collaboration via internal teams, strategic partnerships in the value chain and through the strong global alliance organisations that act as convenors and coordinators. The opportunities are biggest in active ownership and private investing where the returns to scale are most significant.
The big industry convenors come to the fore – central banks, CFA Institute, PRI, IFRS, Investor Agenda, Net-Zero Asset Owner Alliance. Collaboration on various levels is a big multiplier.
Diversity
The DEI dynamic plus the WFA model co-star in a nexus of soft considerations that are steadily transforming the corporate environment
The world of work is changing and its evolving state will change in its context – technology, flexible work (WFA – working from anywhere) , workplace design, employee wellness, diversity, equity & inclusion (DEI); and in its content – the specialised versus routine; the team context and individual; the trust-constrained situations versus trust-optimised; agile process versus rote process; empowered roles versus hierarchical.
The scrutiny on industry people and teams and culture gets intense as new norms are applied to organisations.
The soft strands start to be seen as the key strand.
ESG
The ‘ESG unstoppable train’ is picking up pace and in some case is being turbo-charged by climate change and accelerating to net zero
The investment world is undergoing a paradigm shift in extending from the two-dimensional model (risk and return) to a three-dimensional one (risk, return and impact); from a risk return optimisation to dual organising principles around return optimising and sustainability alignment; from market fundamentalism, MPT and a market context to systems-theory, multi-stakeholders and a society context.
There is a triage in organisations in terms of their commitment to ESG and sustainability– free riders, core players and leaders.
The leaders emerge as ‘truly sustainable organisations’.