Last month in Madrid, the International Forum of Sovereign Wealth Funds (IFSWF) invited FCLTGlobal to its annual meeting to lead a discussion session on navigating disruptive megatrends. 

Almost two hundred participants, representing sovereign wealth funds from around the world, engaged in this discussion, describing the specific trends they are experiencing and which new tools they need to navigate these circumstances successfully.

As first laid out in
Decarbonizing Long-Term Portfolios, there are four distinct approaches to investing within the context of disruptive trends that long-term investors can choose from:

“Silent and principled is how everyone is currently operating, making change hard… It can be productive to shift the status quo.”

The Catalytic Approach in Action

The conversation in Madrid reinforced that catalytic investors can influence markets, economies, and societies so that they can remain resilient through – and find opportunity in – long-term trends. One important way they do this is by investing in businesses more than “trading in paper”: focusing on the resiliency of businesses rather than the short-term rising and falling of stocks and bonds.

“I think it’s too risky not to adopt a catalytic approach… If we don’t get the long-term savings funds [involved as catalysts], we fail as a planet.”

Long-term trends (climate change, inclusive economic development, shifting global demographics, to name a few) and recent market shifts (such as a rise in geopolitical instability, the importance of data security, and advances in AI and other areas of fintech) present sovereign wealth funds, as well as their asset managers and portfolio companies, with constantly evolving opportunities and challenges.

When is it the right time to be catalytic? The group in Madrid coalesced around three key factors –
responsibility, risk, and returns.

Assess your responsibility

  • Does your mandate require it?
  • Do your sponsors value it?
  • Are regulators already acting as catalysts?

Assess the risk

  • Are you responding to a crisis, like COVID?
  • Is there urgency?
  • Is it untenable to remain silent under the circumstances?
  • Are you facing complex, system-wide shifts?

Assess the potential for returns

  • Is there a clear value proposition?
  • Is there potential for creating new markets and/or confronting current market failures?
  • Are you in an advantageous position in terms of the size of your investor base (or across bases)?
  • Is the business in a growth stage or in turnaround mode?
Possible tools to invest catalytically for the long term
Co-investment partnerships Filtering and Prioritization criteria
High-conviction strategiesSimplification tools (eg. checklists)
Leading by exampleConversation Guides: which questions, who to ask, and when

Even when the circumstances are right for taking a catalytic approach, sovereign wealth funds distinguish between that approach and traditional activism. Preserving a light touch is part of being a catalyst; investors taking this approach avoid a deep intervention in a company’s management and maintain the equilibrium between influence and autonomy that often underpins long-term relationships between investors and companies.

The catalytic approach is inherently long term, as it demands a level of patience through high-volatility scenarios, a thirst for innovation, and active engagement to influence today’s asset allocation for the sake of future outcomes. Used appropriately, it can be an effective, transformational methodology against modern obstacles – and one that the funds represented in Madrid are well-positioned to adopt.

Climate, Strategy | Report

Decarbonizing Long-Term Portfolios

11 April 2022 - An Adaptable, Top-Down Approach to Addressing Climate Change in Investment Portfolios

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