Home' Superfunds : Superfunds June 2018 Contents Megatrends are transformational – they can alter the structure
of economies, industry and capital markets. It’s perhaps not
surprising then that more than 80 per cent of respondents
to a survey we conducted last year with the Principles for Responsible
Investment (PRI) expect megatrends to exert an accelerating influence
on financial and social outcomes over the coming decade.
While we know many funds have developed a set of sustainability beliefs,
integrating megatrend thinking into portfolio management—right down
the investment value chain—is not particularly widespread. We believe this
is important; megatrends are long term, slow moving but ultimately likely
to have a material impact. Assessing them therefore sits naturally within an
approach to sustainable investing.
So what constitutes sustainable investing? Essentially it is investing to meet
present and future needs through the management of long-term risks and
This incorporates assets which are resilient to the impact of climate change
(for example), but also those providing sustainable returns in light of other
changes (such as in demographics or technology). It also embeds a valuation
discipline: an overvalued asset might provide sustainable cash flows but
not sufficient returns. Sustainability therefore encompasses environmental,
social and governance (ESG), active ownership, responsible investing and
stewardship, and the analysis of megatrends to gauge the impact of change.
Institutional investors have told us, through their responses to the PRI
survey, that it is difficult to identify the major trends in sustainable investing
and to exploit the likely return premium from long-term investing that reflects
these trends. That leads to the key question: How can superannuation funds
create a truly sustainable portfolio – and be sure they have succeeded?
THE FIVE MEGATRENDS
The survey identified five key megatrends, as well as 21 underlying sub-
trends. At our recent Ideas Exchange conference in Melbourne, we asked
an audience of over 100 asset owners to rank these, according to the most
impact they would have on their portfolios over the next 10 years.
1. Society and demographics (41 per cent of respondents)
The material decline in fertility rates and increases in longevity over
the past century are well known to investors. When combined with
accelerating societal trends, such as wealth and income inequality and
rising public sector debt burdens, demographic shifts have the potential
to drive material transformation. Sub-trends here include the likely
slowing of economic growth, human capital pressures, rise of populism
and conflict, changing consumption patterns, savings conundrum and
public sector debt burdens.
2. Technological advances (34 per cent)
Despite fears that “low hanging” advances are behind us, technological
progress continues to drive productivity improvements and, at its
best, enhance the world’s ability to achieve sustainable and inclusive
economic growth and development. Sub-trends here include digitisation
and the Internet of Things, automation and artificial intelligence,
fintech, biotechnology and personalised medicine, and cyber security
and privacy risks.
3. Emerging economy growth and dynamism (10 per cent)
Recent slowing of economic growth could be a sign that the dynamism
of emerging market economies is waning. However, concentrating on
headline GDP numbers is a mistake. We are long past the point where
emerging economy growth makes up over half of global economic
growth. Led by rapid urbanisation, emerging economies will continue
to become more influential, with ever-increasing consumer power and
expanding corporate competitiveness. Rising geopolitical power will be
exerted via new institutions and governance.
4. Environmental challenges (8 per cent)
We highlight three areas of environmental change over the coming
decade. First, the rise of acute environmental events such as hurricanes;
data from the National Oceanic and Atmospheric Administration shows
that the prevalence of billion-dollar insurance losses (on an inflation-
adjusted basis) increased by 3.5x from the 1980s to the last decade.
Secondly, the chronic impact of global warming – heat stress, water
Superfunds June 2018
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