thinking ahead institute

#TAIAustralia© 2020 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Thinking Ahead Institute members’ use only.

March 2020

Thinking Ahead breakfast seminar

#TAIAustralia

Over what time frame will climate change create material impacts for society?

© 2020 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Thinking Ahead Institute members’ use only.

1

2

3

4

5

6

Now

1-2 years

3-5 years

5-10 years

10+ years

No material impacts

London

(27/11/19)

Sydney

(10/03/20)

Melbourne

(13/03/20)

Australia

(wtd ave)

Global (ave of

Ldn and Aus)

50% 57% 66% 60% 55%

5% 7% 3% 6% 5%

15% 9% 16% 12% 13%

18% 19% 9% 15% 17%

11% 7% 6% 7% 9%

0% 0% 0% 0% 0%

#TAIAustralia

The Institute is going

▪ No printing

▪ No notebooks

▪ Reuse

green


#TAIAustralia

The Thinking Ahead Institute

Global research and innovation partner


The Institute is a global not-for-

profit innovation and research

member group whose purpose is to

mobilise capital for a sustainable

future

Over 40institutional investment

members comprising

asset owners and

service providers with

combined responsibility

for around

US$12 trillion

#TAIAustralia

There are no side-effects – just effects…

Side effects are just a sign that the boundaries

of our mental models are too narrow, our time

horizons too short.

Professor John Sterman, Director of MIT System Dynamics Group


#TAIAustralia

Spectator or participant? The investment industry and climate changeTim Hodgson



Spectating | owning things that exist (secondary markets)

Participating |1. building new things (primary markets)

2. stewardship and engagement

#TAIAustralia

Past returns

aren’t even

a good guide

to the past



Value is

created

within the

boundary

#TAIAustralia

Shareholders

Planet

Employees

Clients

Wider society



Source | Doughnut Economics, 2017, Kate Raworth

#TAIAustralia

[An externality] is theft. That's a loaded

term, but if anyone can come up with a better

term for taking something from people without

their consent and without compensating them,

I'm happy to use that term.

Steve Cicala, University of Chicago


#TAIAustralia

Here’s the gig


‘We’ have built an economic machine that runs 24x7

The economic machine is making the rich richer,

and is dumping its waste into environmental sinks

Our past returns were overinflated –

because we didn’t pay the true cost of production

EITHER | we maintain the machine and risk a future collapse in profits/returns

OR | we risk current profits / returns and re-plumb the machine

Spectate

Participate

#TAIAustralia

We NEED a +1.5C economy


…what would that look like?

#TAIAustralia

▪ What should stewardship / engagement look like?

▪ What role should exclusions play?

▪ Do we need to deliberately strand some of our assets?

▪ What ‘inevitable policy response’ (PRI) should we anticipate?

▪ How do we invest in / build a circular economy?

▪ How do we select which technologies to fund and scale?

▪ When is too late?

▪ How do we redefine fiduciary duty?

▪ How should we structure manager mandates?

▪ How should we change monitoring and reporting?


#TAIAustralia

The ‘why’ behind the ‘how’: Purpose and value creation in the investment industryMarisa Hall



Why?

How?

What?

#TAIAustralia

Why does your organisation exist?


#TAIAustralia

Investment has always been a 3-D proposition


Return

Risk

Impact

Trust

Culture

Diversity

Sustainability

#TAIAustralia

Our purpose

is to create value

for stakeholders



Which stakeholders are

you creating value for?

1

2

What does it mean

to create value?


as judged by

observers,

future wealth

and well-being

for stakeholders,

mindful

of the passage

of time.

Value creation is an increase in the stock of monetary

and non-monetary resources…

used to create…


1Be careful where

you draw your value creation

boundaries

#TAIAustralia

E: Planet

E D

D: Wider society

CC: Clients / customers

B

B: Employees

A: Shareholders

A


#TAIAustralia

What if it was deemed

reasonable for an investor to care

about his/her grandchildren?

Mike Berners-Lee, Author of There’s No Planet B



2Value is in the eye of

the beholder


Society & environment

Greenwashing

Remuneration structuresEmployees

Return on capital

Trust and transparency

Culture and belonging

Shareholders/clients

Responsibility


3 Value creation emerges over

time

#TAIAustralia

Valu

e

Time

Value emerges over time



1Be careful where

you draw your value creation

boundaries

2Value is in the eye of

the beholder

3 Value

creation emerges over

time

#TAIAustralia

A mission statement for the industry


The investment industry should … cause no harm,

and will be truly valuable if it contributes to a world more

fit to live in.

As such, the industry has a duty to ensure its provision of

new capital, and its stewardship of existing assets add

value to the end saver, wider society and the planet

both now and, as far as it is able, into the future.

Mission critical: understanding value creation.

Thinking Ahead Institute, 2018

#TAIAustralia

The investment organisation of tomorrow Becka Bannan (SYD), Jess Melville (MEL)


#TAIAustralia

If you compare the 500 largest asset managers today and ten years ago,

how many new names are on the 2019 list?


1

2

3

4

5

10%

20%

30%

40%

50%

London

(27/11/19)

Sydney

(10/03/20)

Melbourne

(13/03/20)

Australia

(wtd ave)

Global (ave of

Ldn and Aus)

14% 16% 14% 15% 15%

32% 24% 14% 20% 26%

21% 18% 30% 23% 22%

18% 12% 22% 16% 17%

15% 31% 22% 27% 21%


2009

5002019

500

242

#TAIAustralia

WTW’s journey from ‘monitoring’ to ‘engagement’


#TAIAustralia

Culture

Inclusion & diversity

Sustainableinvestment

Manager research priorities


£

#TAIAustralia

Sustainable investment requires a mindset shift


Mindset shift

▪ Return / risk / impact framework

▪ Purpose

▪ Long-term horizon

▪ Externalities

▪ Energy transition

Beliefs

▪ Materiality to financial outcomes

▪ Materiality of extra financial factors

#TAIAustralia

Stewardship as an opportunity for our industry


▪ Redefine the purpose of the industry

▪ Demonstrate actual value creation to society

▪ Allocate more resources to stewardship

#TAIAustralia

Culture assessment


Downgraded

8

The main reason…

Personality cult!

Walked away

5

Reviewed

120

#TAIAustralia

From star fund managers to a team sport


#TAIAustralia

Asset management is lacking diversity


Key decision makersOwnershipAsset class ABC African Latino/Hispanic Asian Female

Manager 1 NA NA NA 9%

Manager 2 0% 0% 0% 0%

Manager 3 0% 0% 0% 0%

Manager 4 0% 0% 0% 0%

Manager 5 0% 0% 35% 5%

Manager 6 0% 0% 0% 0%

Manager 7 0% 0% 0% 0%

Manager 8 0% 0% 0% 0%

Manager 9 0% 0% 0% 0%

Manager 10 0% 0% 15% 0%

Manager 11 20% 0% 15% 15%

Manager 12 0% 0% 0% 0%

Manager 13 0% 0% 0% 10%

Manager 14 0% 0% 0% 0%

Manager 15 0% 0% 100% 0%

Manager 16 0% 0% 0% 0%

Manager 17 0% 0% 0% 0%

Manager 18 0% 0% 0% 0%

Manager 19 0% 0% 0% 0%

Manager 20 0% 0% 25% 0%

Manager 21 0% 0% 0% 25%

Manager 22 0% 0% 24% 0%

Manager 23 0% 0% 0% 3%

Manager 24 0% 0% 50% 0%

Manager 25 0% 0% 0% 0%

Manager 26 2% 0% 7% 17%

Manager 27 0% 0% 0% 0%

Manager 28 0% 0% 0% 5%

Manager 29 0% 0% 0% 0%

Manager 30 0% 51% 0% 0%

Asset class ABC African Latino/Hispanic Asian Female

Manager 1 NA NA NA 9%

Manager 2 0% 0% 0% 0%

Manager 3 0% 0% 13% 0%

Manager 4 0% 0% 0% 40%

Manager 5 0% 0% 35% 5%

Manager 6 0% 0% 0% 0%

Manager 7 0% 0% 0% 0%

Manager 8 0% 0% 0% 6%

Manager 9 0% 0% 0% 0%

Manager 10 0% 0% 15% 0%

Manager 11 20% 0% 15% 15%

Manager 12 0% 0% 0% 0%

Manager 13 0% 0% 0% 10%

Manager 14 0% 0% 0% 0%

Manager 15 0% 0% 100% 0%

Manager 16 0% 0% 30% 7%

Manager 17 0% 0% 0% 0%

Manager 18 13% 0% 13% 25%

Manager 19 0% 0% 0% 0%

Manager 20 0% 0% 25% 0%

Manager 21 0% 0% 0% 14%

Manager 22 0% 0% 0% 17%

Manager 23 0% 0% 0% 25%

Manager 24 0% 0% 75% 25%

Manager 25 0% 7% 14% 36%

Manager 26 5% 0% 10% 19%

Manager 27 0% 0% 0% 25%

Manager 28 0% 0% 0% 5%

Manager 29 0% 0% 0% 0%

Manager 30 0% 40% 20% 40%

#TAIAustralia

In active search for more diversity


#TAIAustralia

In conclusion…


CultureSustainable

investment

Inclusion &

diversity

#TAIAustralia

The total portfolio approach (TPA)Roger Urwin


#TAIAustralia

The story so far


The SAA approach

SAA* was a perfect

construct for a time when

▪ Boards were dominant

▪ Issues were less

complex

▪ Managing managers

was the major issue

*SAA – Strategic Asset Allocation

Roll forward in time

TPA* was born, because

▪ Internal teams grew

▪ Portfolio construction

became complex

▪ Funds saw merit in

splitting roles differently

* TPA – Total Portfolio Approach

Evolved TPA practice

TPA has evolved

on a spectrum

▪ Dynamic asset

allocation

▪ Goals-centred

▪ One team, one focus

But still practiced by only

a small number of funds

#TAIAustralia

Learning from investment results is hard


System features

Aircraft

industry

Investment

industry

Theory is

largely settled

Theory has big

missing pieces

Technology is well

integrated with the

people

The people are not yet

effectively integrating

the technology

Structured learning

Unstructured learning

#TAIAustralia

Total portfolio thinkingTPA benefits are likely to be worth 0.5% to 1.0% pa of additional return


Improved dynamism

▪ more agile

▪ less inertia drag

Quality of decision-framing

▪ more goals-driven

▪ less benchmark drag

Quality of decision-making

▪ integrated decisions

▪ less governance drag

#TAIAustralia

Total portfolio thinking comes on a spectrum


Performance assessed vs. Benchmarks Fund goals

Success measured by: Alpha Total fund return

Opportunities for

investment defined by:Asset classes Assets

Diversification principally

via:Asset classes Risk factors

Asset allocation

determined by a:

Board-centric

process

CIO-centric

process

SAA TPA

Typical

TPA

#TAIAustralia

Total portfolio thinking comes on a spectrum


Performance assessed vs. Benchmarks Fund goals

Success measured by: Alpha Total fund return

Opportunities for

investment defined by:Asset classes Assets

Diversification

principally via:Asset classes Risk factors

Asset allocation

determined by a:

Board-centric

process

CIO-centric

process

SAA TPA

Typical

SAA

#TAIAustralia

Investment framework needs careful design


Talent and rewardMission & goals

CultureOrganisational set-up

(delegations)

Investment

model

People

model

Governance

model

Technology

TPA comes

in here

Portfolio construction

Beliefs

Sustainability

TPA comes

in here

#TAIAustralia

Defined contribution – a work in progress


Nick Callil

#TAIAustralia

The Superannuation Guarantee

(Administration) Act 1992

The Revenue Act of 1978

evolutionary happenstance


DC globally is a product of


1998 2019

DC30%

DB70%

DC>50%

DB<50%

#TAIAustralia

Pension assets as a proportion of GDP (P7, 2019e)

DC assets as a proportion of GDP (P7, 2019e)

151

111

66

187

146

126

136

130

7

3

11

0

23

83

Australia

Canada

Japan

Netherlands

Switzerland

UK

US


#TAIAustralia

The complexities associated with

DB liabilities have been exchanged for complexities

in the design and management of DC institutions

Gordon L. Clark and Roger Urwin (2010),

DC Pension Fund Best-practice Design and Governance


But DC is not simple


Where most plans are

Best practice

Aspirational

DC 1.0 Tax efficient workplace savings

DC 2.0 Post-retirement income provision

DC 3.0 Whole-of-life wealth management

#TAIAustralia

Gliding towards lifecycle?


MySuper products with lifecycle offerings by fund type MySuper products with lifecycle offerings by FUM

2

4

22

5

8

10

17

35

Corporate

Public Sector

Retail

Industry

Lifecycle No lifecycle

8

12

10

3

31

22

12

5

Less than $1bn

$1bn to $5bn

$5bn to $25bn

More than $25bn

Lifecycle No lifecycle

#TAIAustralia

Focus on outcomes

Member engagement

The most important work to progress


#TAIAustralia

Closing


#TAIAustralia

I expect the global average temperature to be __ ℃ above pre-industrial levels

in 2050


1

2

3

4

5

6

<1.5

1.5-2

2-2.5

2.5-3

>3

I don’t have a view

London

(27/11/19)

Sydney

(10/03/20)

Melbourne

(13/03/20)

Australia

(wtd ave)

Global (ave of

Ldn and Aus)

3% 10% 3% 7% 5%

12% 21% 20% 21% 16%

32% 17% 20% 18% 25%

28% 19% 27% 22% 25%

18% 19% 20% 19% 19%

7% 14% 10% 12% 10%

#TAIAustralia

Power of culture study

▪ Explore three critical areas to help sharpen

organisations’ competitive edge: ▪ Culture and leadership

▪ Diversity and inclusion

▪ Vision and strategy

▪ The study is for organisations that wish to:▪ Understand, measure and shape their culture

▪ Understand where they sit in relation to other leading

investment organisations

▪ Innovate around leadership, diversity and inclusion

▪ Support greater purpose and better outcomes for their

employees and clients

Culture is a unique source of value creation and differentiation for investment organisations


#TAIAustralia

Limitations of reliance

Limitations of reliance – Thinking Ahead Group 2.0

This document has been written by members of the Thinking Ahead Group 2.0. Their role is to identify and develop new investment thinking and opportunities not

naturally covered under mainstream research. They seek to encourage new ways of seeing the investment environment in ways that add value to our clients.

The contents of individual documents are therefore more likely to be the opinions of the respective authors rather than representing the formal view of the firm.

Limitations of reliance – Willis Towers Watson

Willis Towers Watson has prepared this material for general information purposes only and it should not be considered a substitute for specific professional advice.

In particular, its contents are not intended by Willis Towers Watson to be construed as the provision of investment, legal, accounting, tax or other professional

advice or recommendations of any kind, or to form the basis of any decision to do or to refrain from doing anything. As such, this material should not be relied upon

for investment or other financial decisions and no such decisions should be taken on the basis of its contents without seeking specific advice.

This material is based on information available to Willis Towers Watson at the date of this material and takes no account of subsequent developments after that

date. In preparing this material we have relied upon data supplied to us by third parties. Whilst reasonable care has been taken to gauge the reliability of this data,

we provide no guarantee as to the accuracy or completeness of this data and Willis Towers Watson and its affiliates and their respective directors, officers and

employees accept no responsibility and will not be liable for any errors or misrepresentations in the data made by any third party.

This material may not be reproduced or distributed to any other party, whether in whole or in part, without Willis Towers Watson’s prior written permission, except

as may be required by law. In the absence of our express written agreement to the contrary, Willis Towers Watson and its affi liates and their respective directors,

officers and employees accept no responsibility and will not be liable for any consequences howsoever arising from any use of or reliance on this material or the

opinions we have expressed.


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