Diversification has long been the investor’s first line of defence. Spread capital across companies, sectors and markets, and many specific risks can be managed. But diversification works less well when the risk affects the whole system.
That is the problem now confronting large asset owners. Climate instability, nature loss, geopolitical fragmentation, energy insecurity, weak infrastructure, housing shortages and social stress all shape long-term portfolios. A fund can reduce exposure to a company or sector. It cannot fully diversify away from the economy in which its beneficiaries live, work and retire.
That makes system-level risk a fiduciary issue, not simply a sustainability concern. The recent CFA Institute work on the Total Portfolio Approach by Roger Urwin and Genevieve Hayman is important because it puts the point in portfolio terms: institutional investors increasingly need to judge investments by their contribution to total-fund objectives, not only by their fit within an asset-class sleeve or benchmark.
It also points to a harder reality: many drivers of long-term value sit beyond conventional balance sheets. They include climate stability, resilient infrastructure, functioning institutions, nature, credible policy and intangible assets such as reputation, workforce capability and social licence.
As Saker Nusseibeh, former CEO of Federated Hermes, argued recently at the IFRS Foundation Conference, intangibles may be one of the most important questions in financial reporting.
A new phase of responsible investment
The Principles for Responsible Investment (PRI) marks its 20-year milestone this year. This is a moment to recognise how far responsible investment has come and be honest about what comes next.
The first phase showed that environmental, social and governance factors could be financially material and should be integrated into investment. That argument has largely been won.
The next phase is more demanding: whether asset owners use their capital, mandates, stewardship, benchmarks and policy voice to help protect the market conditions on which long-term returns depend.
“The discipline is to choose priorities that can be governed, implemented and defended”
I describe this as fiduciary agency. It is not a call for investors to become governments, campaigners or social planners. It is the responsibility of asset owners to use legitimate investment tools, within clear governance and financial-materiality guardrails, where system-wide risks could materially affect beneficiaries.
The guardrails matter. The risk must be financially material. The action must fit the mandate. The tool must be recognised. The trade-offs must be explainable to beneficiaries and trustees. Without those guardrails, system-level investing risks sounding like activism. With them, it is fiduciary discipline applied to risks that travel across markets.
From theory to leadership
The practical test is not whether an asset owner has a longer responsible investment policy. It is whether the issue shows up where behaviour changes – in mandate wording, manager selection, reviews, benchmark design, voting guidelines, capital allocation decisions and conversations with government.
In my conversations with investment managers over recent years, one message was often delivered privately and directly: “Tell us what you want in the mandate, benchmark and review meeting, and we will move faster.” Too often, asset owners send mixed signals. A policy statement says one thing but the performance review rewards another. Managers respond rationally to those incentives.
This matters particularly as passive investing expands. Asset owner agency is increasingly exercised through index rules, data providers, stewardship services and product design, not only through direct stock selection. For large passive exposures, benchmark design may become one of the most important and underused forms of system-level stewardship over the next decade.
“Responsible investment does not need to reimagine fiduciary discipline. It needs to apply it more fully to the world beneficiaries now face”
The same logic applies to national priority investment. Governments facing infrastructure gaps, energy transition, housing pressure and resilience challenges will increasingly look to long-term capital. Asset owners should not become instruments of government policy. But fiduciary independence should not mean silence.
The most useful asset owner contribution to government is often very specific: what pipeline exists, who carries construction or demand risk, how regulation will be kept stable, whether procurement is transparent, and whether trustees could explain the exposure to members. If those questions cannot be answered, the opportunity is not yet investable, however compelling the public need.
Early, disciplined engagement can help turn public priorities into opportunities that meet fiduciary standards. If asset owners do not help shape those pathways, governments may reach for blunter instruments – such as mandates, political pressure or capital direction – before the investable architecture is in place. The best protection against blunt compulsion is credible, practical engagement before pressure becomes acute.
Why credible platforms matter
None of this requires every asset owner to do everything. It does require each to decide where it has scale, exposure and a legitimate means of influence.
For one fund, that may be climate transition in infrastructure and energy. For another, it may be housing, nature, emerging-market transition finance or benchmark design. The discipline is to choose priorities that can be governed, implemented and defended.
Credible investor platforms matter here. Well-governed forums allow asset owners to build scale, consistency and evidence while preserving independent judgement.
Independence need not mean fragmentation. When asset owners work together rather than through disconnected initiatives, markets, companies and policymakers hear a clearer message. The aim is not uniformity; it is enough alignment for long-term capital to be understood.
There is also a free-rider problem that the industry needs to confront more honestly. Every long-term investor benefits from climate stability, resilient infrastructure, functioning institutions, credible policy and social cohesion.
Each can be tempted to let others engage policymakers, support standards, lead stewardship or invest in the platforms that make practical system stewardship possible.
But if these risks are financially material, leaving value protection to others is not a serious fiduciary strategy.
What leadership now requires
The future of responsible investing (FoRI) work published by PRI earlier this year points in this direction. Responsible investment is moving from integration and reporting towards system stewardship. This is not because investors can control whole systems, but because beneficiaries’ outcomes increasingly depend on whether those systems remain resilient enough to support durable returns.
The next phase depends on asset owners exercising five leadership disciplines: be explicit about the system-level risks most material to beneficiaries; be consistent across mandates, allocation, stewardship and policy engagement; be practical about implementation; be constructive with governments on investability; and be prepared to hold the line when political pressure rises.
Responsible investment does not need to reimagine fiduciary discipline. It needs to apply it more fully to the world beneficiaries now face. The biggest risks cannot be diversified away. The question is whether asset owners will use their existing tools to help manage them before others decide for them.
David Atkin was CEO of the Principles for Responsible Investment (PRI) from 2021 to 2025.
