Two long-term and unavoidable realities will affect institutional investors’ decisions and private-market investments
The twin secular forces of artificial intelligence (AI) and climate change are set to transform the future of investing, a new study by BNY Mellon Investment Management and CREATE-Research has concluded.
The study draws from in-depth, structured interviews of institutional investors managing around US$12.75 trillion from 16 countries — including Canada, the U.K., the U.S., China, Germany, Denmark, and Japan — as well as a literature survey encompassing approximately 400 widely respected research studies.
A total of 89% of the participating investors agreed that the two “supertanker” trends represented investment risks: 93% believed that the risks from climate change have yet to be fully priced in across all key financial markets globally, while 86% saw AI’s potential to provoke societal backlash — from displaced human blue-collar workers, for example — as well as geopolitical tension.
Focusing on climate change, 57% of respondents saw the phenomenon as a risk and an opportunity; 36% saw it only as a risk, with the rest taking the opposite view.
They saw investment challenges surrounding climate change that involved uncertainties and “huge judgment calls,” including:
- At what point “draconian governmental action” will become inevitable in view of the slow progress on carbon pricing envisioned under the Paris Agreement;
- Whether potential risks associated with stranded assets should be mitigated now or later at possibly higher costs;
- The greater difficulty fixed-income investors face in engaging with carbon emitters relative to equity investors, prompting a shift toward green bonds; and
- To what extent factors such as quality and low variance already capture the benefits associated with ESG investing
As for AI, 52% of participants saw both investment risk and opportunity from the trend; 33% saw it only as a risk; 7% saw only opportunity; and 8% believed it had no impact either way.
Four investment-specific challenges were seen to arise from AI:
- Shorter corporate life cycles as winners and losers emerge from AI-enabled upheavals;
- A blurring of sectoral boundaries and valuation challenges as some companies straddle multiple industries and markets;
- Onshoring of manufacturing activities, as evidenced by a shift in geographical centres allowed by 3-D printing, that could diminish the prospects of emerging economies; and
- Difficulties in company valuation as intangible assets play an ever-larger role
The two themes are also projected to impact institutional investors’ private-market investments. Aside from increased interest in smart buildings that blend AI and renewable energy, the study found that some investors will be investing in private debt to support young AI-focused start-ups. There will also be continued reliance on private equity “to capitalize on corporate restructuring driven by AI,” with the belief that early-stage seed finance or private markets are the best avenues to realize the value of equity investing.