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Baer Pettit

President and Chief Operating Officer

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Many institutional investors are facing their greatest challenges for many years. They are transforming their investment processes at high speed to reflect today’s imperatives, such as environmental, social and governance (ESG) investing, innovative technology, ever-shifting regulations and demands for greater transparency.

Yet they must do this in a complex and unstable financial environment. I compare this challenge to changing the sails and masts of a ship as it is battered by a storm.

For this report, we surveyed 200 asset owners (pension funds, insurers, sovereign wealth funds and endowments/foundations) owning assets of around $18 trillion. Reading it, I was struck by how the pandemic has further accelerated the shift to ESG. Asked for the top 3 trends that will affect their organization over the next three to five years, 62% cited either climate change or the increasing complexity of ESG measurement — far ahead of other themes such as market volatility and regulation.


But it is not the only transformation. A new wave of data technologies is bringing very significant changes to investment processes. These technologies open the door to new ways of understanding markets and increasing efficiency. There is also a strong focus on making faster progress on employee diversity.

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External forces compound the challenges. Vaccines may bring some welcome relief for society in 2021, but there is no vaccine for the very high levels of debt most governments have issued since the start of the crisis. This and the pandemic’s dark economic shadow may mean the next 12 to 24 months are highly unpredictable.

But this survey also shows how institutional investors are navigating through this storm. The shift to index-based investing, especially indexes based around ESG or factors, is a vital strategy for many, driving down costs and offering an opportunity for risk-adjusted enhanced returns.

The survey also underlines the shift to private assets and real estate as investors pursue returns in a low-rates environment. There are important implications: as investors continue to load their portfolio with private assets, will they continue to accept that these investments sometimes lack transparency? I question this.

We may be entering an era of highly dispersed returns, with a wide gap between the best- and worst-performing portfolios. At MSCI, our tools and solutions help investors understand and manage both risks and opportunities. We also appreciate that each investor is unique; as this survey highlights, the problems of small- and mid-sized investors are very different from those with $200 billion.

If you are an institutional investor wrestling with these challenges, you are not alone; MSCI is working with many of your peers on these topics. We would be happy to discuss these findings in more detail and to share how others are approaching similar problems.

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