Page 4 – Top1000funds.com

This article was published in partnership with Blue Owl Capital.

This article was published in partnership with Blue Owl Capital.

After a formative, largely unsupervised childhood, private markets are finally adulting, which reflects the growing size and importance of the sector, writes James Clarke, senior managing director – global head of institutional capital at Blue Owl Capital.

Private asset managers are facing increased scrutiny and pressure from institutional clients to deliver value and it’s about time.

Those of us who grew up in public markets, and those who are still there, have had many nightmares about being hauled into a client’s office and fired over a dip in performance.

By comparison, private asset managers have enjoyed relative peace and harmony.

Finally, their sleep is being disturbed. As private market managers grow organically and through M&A, shed their boutique image, and morph into giant investment management platforms, they are being held to the same standards as their public market counterparts. No one is exempt from the firing line.

This is a positive development that reflects the size, scale and maturation of private markets, and the increasingly important role they play in portfolios.

They are no longer investment management’s poor cousin, accounting for around 30 of institutional portfolios. This compares to around 10 per cent a couple of decades ago.

Another positive development is that private asset managers are being judged not only against their peers but against other asset classes.

Until recently, they have largely managed to escape comparison, due to the disparity of strategies and returns, their lack of liquidity and transparency, and the absence of standardised reporting.

Ironically, this shift from absolute to relative performance creates a more even playing field, recognising that everything and everyone should be judged on their risk-return profile.

When it comes to performance, private assets are currently holding their own, and this is expected to continue, but greater scrutiny and comparison can only be a good thing for investors and members.

Arguably, the most telling signs that private markets are growing up is that investing in the sector has moved from being a tactical asset allocation decision to a strategic asset allocation decision, across all private asset types.

Furthermore, private assets are not just a capital appreciation play but a capital preservation and income generation strategy.

One example and where the shift from TAA to SAA is most evident is in direct lending, where global private credit assets under management have quadrupled to $2.1 trillion in the past decade.

With the banks retreating from segments of the lending market due to regulatory capital constraints and risk appetite changes, and more people entering retirement, demand for global private credit has led to an exponentially bigger opportunity set.

As a result, private credit has become a key part of most institutional investors’ defensive portfolios. Not only can it add resilience and diversification benefits, but it can also be a strong source of income.

This is a meaningful change, given that not that long ago allocations to private credit were small and funded by a portfolio’s alternatives bucket. At times, if credit spreads were tight or the market appeared distressed, funds could make tactical moves to adjust their allocation.

As more members start drawing a pension, and the amount of money leaving superannuation and pension funds begins to eclipse contributions, private credit and other private market asset classes will become more essential for delivering long-term income and stability.

All these shifts and changes point to an asset class that is growing and maturing. Taking a total portfolio approach, public and private markets both have a critical role to play in serving the needs of investors.

The backlash against diversity, equity and inclusion (DEI) in America is a source of concern for US pension funds with diverse and emerging manager programs like the $284.27 billion New York City retirement systems. It has pledged to allocate 20 per cent of assets under management to diverse managers by 2029 in an increase from current levels of 13 per cent of the portfolio, equivalent to around $23 billion.

The NYC retirement systems’ strategy has firm support from NYC’s Comptroller and other state and city policymakers. However right now Taffi Ayodele, director of DEI and emerging manager strategy at the pension fund’s asset manager, the Bureau of Asset Management, believes pension funds’ ability to allocate to emerging managers is really a question of wait and see.

Ayodele believes the current climate is already damaging the outlook for emerging managers. She’s heard that emerging managers are struggling to get in front of enough LPs or employing a strategy of sending male colleagues to pitch to LPs in Red States.

Ayodele touts the performance and team expertise of some of these emerging managers to peer funds to try and get them in front of new audiences.

“Where we are overweight in certain sectors like private equity, we support firms’ work with other pension funds. It is about information sharing and helping managers fast track closure,” she says. “Many of these GPs simply won’t be able to come back in a year. It’s important to remember that these emerging managers start with less assets under management which limits their ability to sustain their firms through market downturns.”

Positively, diverse managers who successfully close funds in the current market will prove their resilience. However, Ayodele warns that some diverse managers won’t make it through. Moreover, policies that now make it hard for corporations and investment managers to hire more diverse talent, will shrink the pool of candidates that go on to become the diverse managers of the future.

Staying the course

NYC retirement systems’ target allocation to invest more with diverse and emerging managers is bolstered by a new, direct, evergreen program that seeks to invest 10 per cent of the Systems’ annual pacing in private equity to emerging and diverse managers in what Ayodele calls a “significant and huge achievement.”

She now hopes to gain Board approval to expand the program to three additional private market asset classes in a next step.

“These programs not only contribute positively to our portfolio’s returns but also drive tangible economic impact in historically underserved communities and help narrow the racial wealth gap within financial services,” she says.

NYC retirement systems’ set up its diverse and emerging manager program in the late 1990s and expanded it to include private markets in 2012-13.

The investor says private markets minority- and women-owned asset management firms have outperformed their respective benchmarks with an average public markets equivalent (PME) spread of 5 per cent, contributing to the funds’ strong overall performance. Last year, the System’s five pension funds achieved a combined net return of 10 per cent, surpassing their actuarial target rate of 7 per cent.

Ayodele links the outperformance to these managers’ ability to invest in niche markets and exploit inefficiencies in the lower to mid-market space where large managers struggle to invest. “There are both non-diverse and diverse managers that don’t outperform, but when we look at the data, in aggregate, diverse managers are helping drive outperformance in the portfolio,” she says.

Getting in the door

Ayodele believes NYC retirement systems’ emerging and diverse manager programme stands out because of its open-door policy. Any external manager will be able to access a first meeting with BAM if they can demonstrate a portfolio fit, strong performance and a compelling investment thesis. Moreover, if they don’t get in the portfolio on their first attempt, Ayodele says they will be invited back in a few years to apply again.

According to data from Fairview Capital Partners, the number of diverse-owned alternative investment firms grew last year. The firm’s annual “Women and Minority-Owned Private Equity and Venture Capital Firms” report found that the number of diverse managers in the market increased to over 1,000 in 2024, from 907 in 2023.

Organisations running diversity programs that seek to expand recruitment practices to underrepresented demographics, hold anti-discrimination training, or even roll out accessibility measures to people with disabilities, are in the firing line for not being inclusive or open to all.

Although existing or settled law hasn’t changed, US President Trump’s sweeping executive orders to scrap diversity equity and inclusion have introduced risk to diversity, equity and inclusion (DEI) programs, ushering in a new level of uncertainty on what constitutes an illegal DEI policy and raised the spectre of enforcement by the federal government. The situation is most visibly affecting universities, but private companies are increasingly in view. Meanwhile, investment organisations from BlackRock to Citigroup have rolled back DEI to comply with the new regulatory landscape, scrapping workforce representation goals and the need to interview a diverse slate of candidates for open positions.

Some asset owners interviewed by Top1000funds.com welcome the axe-wielding. They say DEI has grown into an industry (estimated at $9.4 billion) of advisors and trainers which, like ESG, is in danger of breaching fiduciary duty in its quest to use other people’s money to engineer social change. Moreover, DEI in its current guise isn’t working because diversity in the investment industry remains poor.

Others worry that scrapping DEI initiatives will impact their ability to hire and retain the diverse talent that they believe is essential for financial outperformance. They say it is already endangering successful emerging manager programs and jeopardising their ability to engage with corporates on diversity – and other issues – that impact returns.

Undaunted by the new political landscape, the chief investment officer of the Illinois Municipal Retirement Fund (IMRF), Angela Miller-May, has little patience for asset managers that have rushed to review their internal diversity programs or external commitment to the cause because they are worried about compliance with the President’s executive orders.

“For us, this raises the question of whether an asset manager is going to continue to attract talent and have diverse teams, and if we want to continue to invest with them going forward. Most asset managers know this is something we care about but there is a subset that have always wanted to say they cannot think about DEI, or ESG, because they are fiduciaries. They’ve just never equated the two yet having diverse teams that lead to better decision making and positive financial outcomes is being a good fiduciary.”

Still, as IMRF puts pressure on its external managers to maintain their DEI programs, asset owners like the Missouri State Treasury are dragging their managers in the opposite direction.

In February, State Treasurer Vivek Malek who oversees an $18 billion portfolio of state assets mostly invested in fixed income – and whose Indian heritage makes him a less obvious advocate for dismantling DEI among his fellow red-state treasurers – led opposition to a slate of nominees to Vanguard’s board of trustees due to concerns about their approach to DEI and ESG.

“We’ve made it clear to our investment partners that our office will not support practices that prioritise DEI or ESG criteria over fiduciary duty,” he says. “Encouragingly, we’ve seen firms begin pulling back from such strategies as public scrutiny grows and states like Missouri push for a return to core investment principles.”

Diversity within asset owner organisations helps attract talent

Practising what it preaches, IMFR has nurtured diversity internally to the extent that seven of the 16-person investment team are women. Other asset owners have also made it a priority. CalSTRS boasts 50/50 gender diversity within the investment branch and hiring practices at MassPRIM, which is a signatory of the CFA’s DEI Inclusion Code, include “a focus on intentional diversity in each step of [the] recruitment process”, partnerships with “affinity groups” and “regular pay equity studies,” according to its website.

Sociologist Frank Dobbin, the Henry Ford II Professor at Harvard University, is convinced asset owners will struggle to attract skilled and talented staff in today’s competitive market if they drop these supportive initiatives and policies.

“We know from research that when employers send a signal that they are open to diverse candidates, they get more people applying and more people stay on,” he says. Moreover, he believes the threat of the Trump administration prosecuting reverse discrimination cases will have a long-term and chilling effect on all kinds of policies from parental leave to disability support which have helped investors recruit and retain talent.

“Trump is not just telling agencies not to enforce these regulations and employers that the regulations won’t exist. He’s telling employers that he will use government agencies to prosecute them for discriminating against white people, particularly men,” Dobbin says.

Again, it’s an outlook Missouri Treasurer Malek is quick to rebuff. He argues that the American system successfully rewards talent and determination, regardless of race or background, without the need for DEI policies: his rise to become the first person of colour to head Missouri’s State Treasury is testimony to the fact.

The notion that success is only possible with DEI policies is both patronising and false

“The notion that success is only possible with DEI policies is both patronising and false. Across this country, including in my own life story, there are countless examples of people from all backgrounds succeeding through hard work, education, and perseverance. We should be encouraging individuals to see their identity not as a barrier but as a source of strength. Victimhood mentalities limit potential; merit-based systems unleash it.”

Does diversity pay?

CFA Institute argues that data from firms that have committed to its DEI Inclusion Code – which champions positive systemic change in the investment industry by addressing challenges that come with demographic, cultural, and societal variations across markets – shows they are more successful at hiring and retaining the diverse talent that supports better outcomes.

“DEI policies help companies attract and retain the best talent and create an environment to achieve optimised outcomes,” says Sarah Maynard, global senior head, inclusion at the CFA.

Other investors espouse the value of cognitive diversity in their own investment teams.

John D. Skjervem, chief investment officer at Utah Retirement Systems, argues the productive power of cognitive diversity was well documented almost two decades ago by University of Michigan professor Scott E. Page in his landmark book, The Difference. Page’s endorsement of the value of collective wisdom particularly struck a chord when Skjervem joined the $140 billion Oregon State Treasury as investment division director and CIO in 2012 and found the investment staff exhibited no meaningful diversity and suffered, in his opinion, from latent unconscious bias.

“It was a very real phenomenon,” he recalls, “where the ‘right fit’ would often manifest as an outdoorsy, middle-aged white guy who enjoyed fishing and hunting.”

With support from the administration of then-Treasurer Ted Wheeler, Skjervem says Oregon began the intentional and at times forceful pursuit of better cognitive diversity after which “the dam burst, and our physical diversity profile started to improve significantly.”

Some are convinced that DEI actively harms the investment process.

“DEI prioritises social engineering over fiduciary duty, undermining the responsibility to maximise returns and manage risk for taxpayers,” says South Carolina’s State Treasurer Loftis Curtis who oversees the state’s $75 billion of public funds. “President Trump is right to dismantle DEI because it injects politics into investing, weakens accountability, and shifts focus from performance to ideology. This threatens sound governance and risks long-term financial harm.”

DEI prioritises social engineering over fiduciary duty, undermining the responsibility to maximise returns

In truth, there is little hard data on either the extent to which a diverse investment team outperforms its benchmarks and peers or the return premium earned from investing in companies with diverse managements and boards.

An easier place to unearth hard numbers linking returns and DEI lies in emerging manager programs where many US pension funds including the $209 billion Teacher Retirement System of Texas, the $109 billion MassPRIM and the $533 billion CalPERS purposefully mandate to diverse and emerging external managers in search of higher returns.

The $284.27 billion NYC retirement systems has a $23 billion allocation to diverse managers which has grown $6.3 billion since 2022. Private market mandates to women and minority-owned firms have outperformed their respective benchmarks by an average public markets equivalent (PME) spread of 5 per cent. In public markets, emerging managers are expected to outperform standard benchmarks (Barclays Aggregate, Russell 2000 and MSCI EAFE) net of fees.

Last year, New York’s five pension funds achieved a combined net return of 10 per cent surpassing their actuarial target rate of 7 per cent. Taffi Ayodele, director of DEI and emerging manager strategy at the New York Bureau of Asset Management, which manages assets for the city, says diverse managers contributed to that success.

“When we look at the data, in aggregate, diverse managers are helping drive outperformance in the portfolio,” she says.

It’s a similar story at IMRF where diverse managers currently invest around $14 billion of the $55 billion portfolio backed by an aspirational target to invest 20 per cent of AUM with minority managers enshrined in the Illinois Pension Code.

IMRF doesn’t distinguish diverse manager returns from the returns of its wider manager cohort, but CIO Miller-May says these managers are central to IMRF consistently hitting its target return of 7.25 per cent. They add value, mitigate the risk of group think, and demonstrate alignment by allowing IMRF to tap fee benefits in exchange for providing seed capital.

In private markets IMRF also expects mid-market diverse managers to see more exits and distributions than others in the current environment because they can exit to larger GPs.

The worrying outlook for diverse managers

But these programs face jeopardy. Top1000funds.com interviewees say it’s possible that allocating to emerging manager programs could face legal challenges if the issue reaches the Supreme Court. The June 2023 ruling that barred race-based affirmative action in college admissions shows the potential for broader legal shifts.

The NYC retirement systems’ strategy has firm support from NYC’s Comptroller and other state and city policymakers. However right now, Ayodele believes the pension fund’s ability to allocate to emerging managers is really a question of “wait and see” and says the current climate is already damaging the outlook for emerging managers. She’s heard that emerging managers are struggling to get in front of enough LPs, and other stories like female founders sending male colleagues to pitch to LPs in red states.

Ayodele now touts the performance and team expertise of some of these emerging managers to peer funds to help them find new audiences.

“Where we are overweight in certain sectors, like private equity, we support a firm’s work with other pension funds. It is about information sharing and helping managers fast track closure,” she says. “Many of these GPs simply won’t be able to come back in a year. It’s important to remember that these emerging managers start with less assets under management which limits their ability to sustain their firms through market downturns.”

Policies that make it harder for the investment industry to hire, promote and retain diverse talent may also shrink the pool of diverse founders and professionals spinning out in the future. “You don’t just wake up one morning and think ‘I’m going to run my own hedge fund or private equity firm’,” says Miller-May. “It takes years to build up experience and a track record of investing.”

It’s one of many reasons why DEI in the majority-owned asset management community is a key focus of stewardship at IMRF.

Proxy voting under attack

It’s not just the asset owners’ ability to nurture diversity internally or engage with their asset managers on DEI that has got more complicated.

A climate of uncertainty has settled over investors’ ability to exert influence on board diversity, gender pay gaps and wider ESG issues, in the companies they own. In a sign of the times, State Street’s asset management unit has dropped proxy voting policies that required company board nomination slates feature a certain percentage of women directors. Elsewhere, US communications group Verizon recently abandoned its DEI program for approval from the Federal Communications Commission (FCC) on an acquisition.

Doubts about the reach of active ownership is also starting to wash-up on European shores. The US administration has asked European firms to comply with DEI or risk disqualification from US federal contracts potentially impacting sectors like defence, aviation and infrastructure.

Tim Manuel, head of responsible investment at the United Kingdom’s £64 billion Border to Coast which engages on DEI with portfolio companies both internally and via its external managers articulates the new uncertainty.

“Asset managers tasked with engagement are in a difficult situation because a lot of the change that is happening has legal ramifications. We don’t want to rush into a situation and pump our fist in a way that is not feasible because of the environment they are working in.”

“Depending on where you are coming from or what sector you’re in, making public statements about ideas related to ESG has got more difficult, but I haven’t seen any changes yet in the way investors engage via the boardroom about the things they find important. Climate problems are not gone, and companies are aware of that,” reflects Ronald Wuijster, chief executive of APG Asset Management which invests on behalf of €552 billion Stichting Pensioenfonds ABP.

“For us, investments are made according to four elements comprising return, risk, cost and sustainability, and that hasn’t changed.”

Others are also determined to press ahead with corporate engagement. Back in January during a presentation to the CalSTRS’ board, portfolio manager Lynn Paquin said the team will continue to engage with corporates regarding diverse director representation on boards and disclosure of basic workforce metrics.

“The goal of our outreach is simple: to have an open dialogue to better understand why companies have made this decision and to reiterate our conviction that robust DEI programs and disclosures can be a positive indicator of an inclusive workplace culture to attract and retain staff, drive productivity, and reduce reputational risk.”

Paquin observed that “the vast majority” of companies pushing back on DEI are not dropping their training and inclusion programs, or workforce reporting. Instead, most of the roll back is focused on public facing programs and changing the language around social policies.

Time for a reset

Other themes are emerging amid the confusion and disruption of dismantling DEI.

Even diversity advocates see the current situation as a chance to reframe the issue and articulate what DEI means in the same way sustainable investors have been challenged on ESG.

It’s an opportunity to re-evaluate if mandatory diversity training, job tests, and grievance procedures really work and Harvard’s Dobbin, for one, doubts they do.

“Targeted internships for minorities don’t affect the workforce very much and diversity training is not a substitute for changing behaviour. It also often backfires because it seeks to convince people they are biased and guilty of sexism and racism which typically angers them,” he reflects, arguing high performance management practices like mentorship are more effective at moving the diversity needle, as well as employee work/life benefits.

John Skjervem, now chief investment officer of the Utah Retirement Systems, goes further still.

“Despite good intentions, DEI programs are exacerbating the problem by subordinating the holy grail of cognitive diversity to quota-based goals” prioritising gender, race, ethnicity and sexual orientation. The result, he says, “is ever greater divisiveness and a further balkanisation of society, not the world I want to live in.”

“DEI and other preference-based approaches are simply the other side of the discrimination coin, violating the civil rights of those who don’t enjoy politically defined preference,” he continues. “My mother taught me at an early age that two wrongs cannot make a right so instead of DEI, we should keep our focus and aspirations on improved cognitive diversity from which a more representative and better integrated meritocracy will emerge.”

DEI and other preference-based approaches are simply the other side of the discrimination coin

In an uncertain environment, heightened by the risk of litigation, the CFA’s common-sense messaging like the importance of shaping a recruitment program with broad selection criteria because programs that don’t target an identity are more successful is a useful guide.

Although the value of diversity – and by extension cognitive diversity – is engrained in investment more than other professions, the industry remains divided and now thwarted on the means to get there.

“It’s going to be a long four years,” concludes Illinois’ CIO Miller-May.

This article was produced by Capital Group without involvement from the Top1000funds.com editorial team.

Asset allocators are facing heightened uncertainty in almost every conceivable direction.

President Trump’s tariff agenda looks to be here to stay in some form, but in reality, its longevity is difficult to predict – as is its precise impact on economic resilience across global regions.

Now tariffs have increased the threat of a slowdown or even a recession, bond futures markets reflect expectations of faster and further rate cuts from the US Federal Reserve and European Central Bank. However, the likelihood that tariffs will exacerbate already sticky inflation in the short term creates a difficult balancing act for central bankers.

Meanwhile, global equities have experienced extreme levels of volatility and credit spreads have widened amid concerns of a tariff war.

Against this backdrop, our global Fixed Income Horizons Survey (with research done over February, March and April 2025) finds that asset owners are, on a net basis, increasing allocations across fixed income sectors, seeking geographical diversification – particularly those in Asia-Pacific and EMEA – and trusting bonds to provide ballast against equity risk in portfolios. They are also taking a more active stance in portfolios, as rebalancing and risk management become a bigger priority.

Our headline findings

Asset owners’ 12-month outlook points to heightened uncertainty

Amid an increasingly uncertain economic backdrop, the vast majority of asset owners (72%) say they will be highly selective and cautious in their approach to credit risk over the next 12 months. Most plan to keep credit risk exposure unchanged (54%), and slightly more are adding (25%) than reducing (21%) their exposure.

Portfolio positioning indicates upweighting fixed income and leaning into duration as asset owners hedge risks

In aggregate, more asset owners plan to increase than decrease allocations across all fixed income sectors – including public and private – with high-quality credit favored. This may partly be in response to heightened volatility in equity markets, as 49% think stock-bond correlation will weaken over the next 12 months, meaning fixed income will provide more effective diversification. And more than twice as many asset owners are extending (38%) as shortening (17%) the duration of fixed income portfolios, enabling them to lock in income while potentially helping to preserve capital in the event of a market shock.

Asset owners are rethinking the regional balance of bond portfolios – with those in Asia Pacific and EMEA particularly focused on diversifying internationally

Overall, 44% of asset owners are planning significant regional rebalancing of bond portfolios over the next 12 months, rising to 51% among Asia-Pacific respondents and 47% of those in EMEA. This internationalisation is reflected within investment grade credit, with 47% of EMEA asset owners increasing allocations to the US as well as within Europe (38%), and 34% of Asia-Pacific asset owners increasing allocations to the US and 42% within their home region. It is reflected within high yield credit too, where allocators in Asia-Pacific and EMEA are prioritising global and US high yield alongside their home region. North American asset owners are maintaining their typical home bias, but it is notable that 26% plan to grow their European high yield allocations.

Traditional portfolio buckets are being reassessed as the private credit market continues to evolve

Private credit is playing an increasingly important strategic role in asset owners’ portfolios, with 72% saying it should play a complementary role alongside public credit. However, there are still knowledge gaps in terms of optimising the blend of public and private credit in portfolios, with only 54% confident they know how best to achieve this, dropping to 44% among DC pensions. Further, more asset owners agree (39%) than disagree (28%) that public and private credit will ultimately be treated as a unified credit bucket in portfolios.

Emerging market debt is seen as a source of diversification – with appetite for hard and local currency assets

Those asset owners increasing or adjusting emerging market debt allocations over the next 12 months say diversification benefits (52%) are a key driver, alongside attractive yields (62%). There is significantly stronger appetite for investment grade than sub-investment grade assets, possibly due to concerns about the vulnerability of sub-investment grade credits if global growth were to weaken. Asset owners are clearly looking at a balanced mix of exposures within investment grade, with 61% increasing allocations to sovereign hard currency debt, 53% to corporate and 49% to sovereign local currency debt.

Active management will play a more dominant role in portfolios as rebalancing and risk management come to the fore

As they seek to navigate deeper and more varied sources of risk, 49% of asset owners plan to increase the share of active strategies in their fixed income portfolios, versus just 5% decreasing this. A majority of investors think active strategies will add value over passive across all public fixed income sectors over the next 12 months. This view is strongest in relation to high yield credit (87%), emerging market debt (86%) and investment grade credit (81%). When asked an open question about the future role of active management in fixed income, 74% of respondents indicated it will be central to their portfolios, for a combination of reasons, including enhanced returns, risk management, the changing market environment and ability to customise strategies.

Find Out More, click here.

The transition to a net-zero carbon economy is often thought of as inevitable given the overwhelming scientific consensus that mitigating climate change is necessary to avoid catastrophic consequences.

However, justice within this transition is not guaranteed. The concept of a ‘just transition’ represents a difficult ethical and systemic challenge, and the pathway to achieving it is full of tensions, contradictions, and conflicting incentives.

The term ‘just transition’ encapsulates the idea of ensuring fairness and equity in the shift towards a sustainable economy, particularly for those who may bear the brunt of the transition’s disruptive effects, such as workers in carbon-intensive industries, marginalised communities and populations in developing economies.

When surveyed, members of Thinking Ahead’s Climate transition working group agreed unanimously that a just transition and inequality are systemic risks which will impact the carbon transition and have the potential to derail it. Justice directly intersects with the global push for decarbonisation and climate resilience.

When it comes to responsibility for action, however, there is a stark division in perspectives on the roles and responsibilities for addressing the just transition. Approximately 25 per cent of the working group viewed the issue as the responsibility of governments, arguing that public institutions possess the necessary tools, authority and resources to address such complex social challenges. On the other hand, 75 per cent acknowledged that governments cannot tackle this challenge alone, emphasising that investors and private institutions also hold a critical role in shaping solutions.

However, despite this broader acknowledgment of shared responsibility, a substantial tension emerged when it came to action. The majority expressed an unwillingness to compromise their financial outcomes in pursuit of just transition objectives. This highlights a critical ethical dilemma for investment organisations: balancing fiduciary duties to maximise returns with the broader societal need to mitigate systemic risks. The current reality, shaped by the incentive structures that dominate financial markets, underscores a collective inertia that prioritises short-term gains over long-term systemic stability.

The reluctance to share the pain stems from several factors – current incentive structures, perceived lack of responsibility, unclear benefits, which are diffused and long-term.

Meanwhile, there are also cultural norms. Societal values that emphasise material wealth and individual success over collective wellbeing hinder the cultural shift needed to prioritise equity and sustainability. This mindset discourages actions that appear contrary to personal economic interests.

Addressing the systemic risks of inequality and climate transition requires a fundamental cultural shift – from decades of prioritising wealth accumulation to valuing well-being, relationships and societal harmony (and, possibly, the value of accumulated wealth over the long term).

Such a transformation is difficult and takes time. It involves redefining success and aligning economic incentives with sustainable and equitable outcomes. For instance, the integration of environmental, social, and governance (ESG) considerations into investment frameworks appeared to be gaining traction, but it ran into stiff opposition from the dominant mindset that prioritises financial returns. A meaningful cultural shift would require embedding principles of justice and equity at the core of financial systems.

The recognition of a just transition as a systemic risk is an important step, but it must be followed by meaningful action. Investors, along with other stakeholders, possess agency within the system. Through lobbying, advocacy, and innovative financial instruments, they can influence the rules and incentives that shape market behaviour.

By reallocating capital to support a just transition and by investing in climate solutions in emerging markets, they can accelerate the shift and contribute directly to equitable outcomes. Engagement with industries and policymakers allows investors to push for higher standards in corporate practices and shape regulatory frameworks that incentivise sustainable and inclusive practices.

Reconciling the tension between ethics and practicality in investment strategies requires a significant shift in perspective. Investors must recognise that justice and sustainability are essential elements of long-term value creation and move towards action. While the current incentive system reinforces the primacy of short-term financial returns, there is growing recognition that such a narrow focus is unsustainable in the face of mounting social and environmental challenges.

Addressing systemic risks, such as social inequity and climate injustice, demands a move away from short-term profit maximisation towards a broader, systemic approach that acknowledges the interconnectedness of economic, social, and environmental factors.

The interplay of all these factors in the transition to a sustainable economy will shape the trajectory of our collective future. The costs of inaction can be profound, so the question is not whether we can afford to act but whether we can afford not to.

Anastassia Johnson is a researcher at the Thinking Ahead Institute at WTW, an innovation network of asset owners and asset managers committed to mobilising capital for a sustainable future.

Amidst managing liquidity and risk levels, investors have also been looking for opportunities to deploy capital into the market. Investment team meetings at Railpen, asset manager for the £34 billion pension scheme for employees of the UK’s railway, have involved rattling a tree and seeing what comes down.

Investing in currencies has landed in the opportunities bucket, as well as long short equity strategies given the emergence of corporate winners and losers as tariffs drag down revenues for some companies more than others.

“Currencies move in this space,” Mads Gosvig, chief officer, fiduciary and investment management tells Top1000funds.com, adding although it’s difficult to see the long-term impact on the dollar’s safe-haven status through the noise “the suppression of the dollar could be one theme [of the Trump administration].”

Longer-term, the team is also exploring whether to have the same reliance on the US in a portfolio that invests around 44 per cent of assets in equities.

“The MSCI benchmark has around a 60 per cent weighting to the US. Is this a good idea or would it be better to skew the weight to other regions? European equity has already outperformed US equity this year,” he says.

In uncertain economic times, he is also increasingly wary of private debt where looser lending standards and a vast amount of capital has flooded in recent years, worrying investors.

Over the past five years, Railpen has gradually built out its interest rate/credit exposure in the portfolio and the externally managed allocation will be rolled out further.

“Some of the returns in private debt are almost just as good as what we have seen in private equity. Investors get the same type of promises in a trend that is being driven by the way managers structure these portfolios and develop the underlying exposure. It is interesting to see how this will develop.”

Yet his enthusiasm is tempered by concerns that private credit which took off after banks retreated from lending post GFC has never experienced a full-blown crisis like 2008. “Private debt remains untested. I think there are probably many private debt providers out there, big and small, that if there was some kind of crisis would fall off,” he says.

In today’s challenging economic climate he is also concerned about long-term growth prospects in the UK where Railpen invests around one third of its assets (£11 billion) across stocks, private equity and infrastructure. Echoing concerns voiced by other large UK investors like £45 billion LGPS pool Border to Coast, he reflects that small and mid market businesses that have proved themselves are struggling to access the capital they need to grow.

“To create growth, capital must flow to where it is most needed. UK and foreign capital is flowing down into the system, but it is still not reaching right down to the lowest level like start- ups that need £5-20 million to capitalize on all their good ideas. We need intermediation on how capital gets to where it is needed most to create a system that is more efficient.”

Client focused approach

Railpen undergoes an actuarial evaluation every three years and is approaching its next one. The process is a chance to adjust the asset allocation and this time around the team are particularly focused on taking down the risk level of some of the well-funded, mature and closed DB pensions in the pool.

“Amongst our client group we have mature, closed defined benefit pensions. They are now well enough funded to take off risk, and we want them to consider moving towards buy-in or buy- out. We are currently adjusting the portfolio to be able to deliver on the needs of this group.”

Meanwhile with the open sections, his focus is on ensuring access to illiquid and liquid growth assets in a process that involves repositioning what it is in the portfolio to deliver to different needs, rather than “buying new things.”

Other focus areas include enhancing efficiency in the liquid multi asset pools that account for around £22 billion, fine tuning FX hedging and rebalancing stratgies, for example.

Elsewhere, he is working on improving processes in public equity. For example, a quant solutions team is exploring new technology. “They are working on different ways to apply newer tech. It’s not as sophisticated as AI, but we are running models and improving and enhancing our quant processes.”