Research from BNY Mellon Investment Management has found that climate change and artificial intelligence are seen as materially important factors to investment asset allocation by investors.
According to BNY Mellon’s report, Future 2024: Future proofing your asset allocation in the age of mega trends, 93 per cent of investors surveyed view climate change as an investment risk that has yet to be priced in by all the key financial markets globally.
On the climate change front, BNY Mellon noted slow progress on carbon pricing – envisaged under the Paris Agreement – is leaving investors guessing at what point draconian governmental action will become inevitable.
Further, there is a persistent investor dilemma on the future of stranded assets, with investors weighing up whether to mitigate investment risks now or later at potentially higher costs.
Meanwhile, over 85 per cent viewed AI as an investment risk that could potentially provoke societal backlash as well as geopolitical tension.
With regards to AI, BNY Mellon said corporate life cycles will get shorter as AI creates winners and losers, as shown by the impact of the earliest versions of the iPhone on Nokia in 2007.
In addition, industry sectoral boundaries will blur, as AI reconfigures entire products, as seen with Tesla, which straddles multiple sectors, causing valuation issues.
In response to these challenges, BNY Mellon said investors are increasingly mixing active and passive investment strategies, focusing on idiosyncratic risk in portfolios, targeting emerging innovation leaders and blending hard and soft metrics in their analysis.
“The best opportunity is rarely the most obvious one. For investors caught up in the day-to-day maelstrom of constant change, choosing the right path can be difficult,” said BNY Mellon Investment Management global head of distribution Matt Oomen.
“Compounding these challenges are large secular trends, such as artificial intelligence and climate change. Already we are witnessing a change in the way markets operate in response to these two supertanker trends.
“These will be the defining challenge not just for the current generation of asset managers and investors, but for generations to come.”