Why sound governance is key to pursuing investment returns

A new report lays down investment actions that can mitigate the impact of COVID-19

Why sound governance is key to pursuing investment returns

The COVID-19 pandemic has brought unprecedented disruptions to the global economy, causing far-reaching impact on liquidity, market volatility, valuation adjustments, and significant changes to forward-looking return expectations for many asset classes. The crisis has also driven down interest rates and oil prices, and wreaked havoc on the fiscal solvency of many government and private institutions.

However, a recent Mercer report revealed that these disruptions are not insurmountable and can be mitigated and addressed through sound investment governance.

The report examined how large asset owners were devising ways to pursue attractive risk-adjusted investment returns while taking investment actions to weaken the impact of the coronavirus crisis through investment governance.

The report is linked to Mercer’s ongoing multi-year Transformational Investment collaboration with the World Economic Forum (WEF). The series explores investment and governance practices for global systemic risks.

Through this collaboration, the WEF and Mercer had provided institutional investors with a six-step governance and decision-making framework to pursue attractive risk-adjusted returns. The principles were:

  • Understanding the overall impact on the funding entity, objectives, and beneficiaries;
  • Collaborating with similarly situated organizations who are concerned about the same risks and opportunities;
  • Designing governance, policies, delegation, and accountabilities for material systemic risks;
  • Investing to manage the portfolio’s exposure to the global systemic risk;
  • Transforming through driving investment strategy that aims to deliver change; and
  • Monitoring and revisiting – applying learnings to improve policies and processes.

Given this framework, Mercer’s paper rolled out two objectives for institutional investors:

  • Evaluating governance strategies developed to address systemic risks, in terms of addressing the COVID-19 pandemic-driven market crisis; and
  • Considering practical investment actions by long-term investors that support economic recovery and generating attractive risk-adjusted returns. Investments that support economic recovery and resurgence are considered “transformational.”

“As illustrated by the COVID-19 pandemic, our economy, society, and planet face numerous long-term, global systemic risks, which need to be mitigated,” said Rich Nuzum, global president of Mercer’s Investments and Retirement business. “Institutional investors have the ability to respond to these challenges and continue to seek positive investment outcomes, while mitigating the effect of these systemic risks. This is especially true when it comes to governance, as sound and robust investment practices can benefit the economy and broader society through periods of market volatility and economic uncertainty.”