Speakers:

1. Babloo Sarin: Head of Asset Owners and Official Institutions Segment, Asia Pacific, State Street

2. Garry West: Senior Manager, Media & Communications, Australian Institute of Superannuation Trustees

Garry [00:00:02] Hello and welcome to our podcast on growth. I'm Garry West, Senior Manager, Media and Communications with AIST. I'm joined by Babloo Sarin, the State Street Head of Asset Owners and Official Institutions Segment in Asia-Pacific. Today, we'll be discussing the highlights of State Street's recent growth study, which explores the key opportunities and challenges for growth across the investment industry in 2022. More specifically, we will dive into what Asset Owners across the globe are prioritising in 2022 and how they will go about achieving them. So Babloo, welcome. To get us started, can you tell us how optimistic are Asset Owners about the short and medium-term outlook for growth? And what are some of the trends you observed across regions in terms of growth priorities?

Babloo [00:00:50] Thanks, Garry and firstly, thank you for having us on. Maybe before I answer the question, I'll give us some context as to what we've done. We captured input from more than 600 investor industry leaders across 21 markets, and I'd say a third of those respondents were Asset Owners. What we saw overall was confidence in the short-term growth outlook, which weakened from the previous year due to the pandemic, bounce back across all three regions  - Europe, North America and APAC. However, what we saw was confidence in the long-term growth outlook had slipped year-on-year, meaning in terms of Growth priorities, one of the resounding themes that was evident across all regions was the focus on improving funded status in order to meet future obligations, particularly in Europe, with 26% of respondents noting that was a top priority. That wasn't a huge surprise to us given the evolving expectations of Asset Owners, but also what we see the expectations of key stakeholders and society more broadly. These really centered around reporting disclosure requirements in ageing populations / slowing birth rates and liquidity crunch, which we saw over the last two years as a result of the pandemic. In Asia-Pacific and specifically owners who told us that they were focused on increasing assets under management. And I think this points to an underlying theme of scale, which is definitely topical in Australia, whereas in North America, respondents highlighted their focus on improving investment performance. Across all regions, almost equally, we observed a refreshed emphasis on the need to improve operational efficiencies.

Garry [00:02:19] It's an interesting divergence between the short and long-term growth outlooks. Why do you think confidence in the longer-term growth outlook weakened year-on-year when it improved in the short-term?

Babloo [00:02:30] That's a great observation, the long-term optimism in what we saw was that in 2020, it was very high. So what we saw is a little bit of a step down in '21 and this is really just coming off a high base. But the step down wasn't terribly steep. If we look at the long-term trends, we see that the long-term optimism is there or thereabouts in terms of where it was at 2019. But the decline in 2020 could partly be explained in the funding and obligation issue that we just discussed for the defined benefit funds, especially in other AOs, the long-term obligations, running surpluses and keeping deficits manageably low, is an ongoing concern and an extra year of turbulence, the pandemic, unpredictable markets certainly had a knock on effect on funds' ability to meet their long-term strategies and objectives, or at least in their abilities to forward model, which hit their confidence in their ability to meet those long-term targets.

Garry [00:03:28] You made some interesting points there, Babloo, and I think Australian Superannuation Funds can definitely relate to the first point around improving their funded status. Moving on what were some of the key threats identified that could hinder these Growth prospects?

Babloo [00:03:43] Yes, quite an interesting one, I mean, the Asset Owners were concerned that the increase moved to more remote working arrangements was a threat to growth. Around 38% of respondents in Europe ranking that as a significant threat to achieve their growth targets this year. The other area we saw was the rising importance of ESG. This was somewhat expected seeing what we've seen in the broader media. But however, we saw a greater emphasis of concern residing in APAC - 42% of respondents ranking this as a key threat. We expect this because regulatory clarity and framework in APAC region probably lags its peers in Europe and the US, but positive signals and the right direction, nonetheless. Another interesting area, as I mentioned earlier, was the perceived threat around a move to more remote working arrangements. An average of 34% of Asset Owners around the globe saw this is a key threat in 2022.

Garry [00:04:37] Yes, that's interesting and we can dive deeper into those two points a little later, but now we can touch on the capital investment that Asset Owners are looking at this year from a technology perspective. What are some of the key outcomes Asset Owners are hoping to achieve this year from technology investments?

Babloo [00:04:54] Absolutely, it’s certainly an interesting space given the developments in Digital Assets and also to the point made earlier, the focus on operational efficiencies and how emerging technologies such as AI and Robotics play into improving the operating environment. If I just focus on Digital Assets first, 34% of our respondents globally noted the ability to offer their clients or members access to crypto and digital assets market was key. As we start to see more regulatory clarity for this asset class, we expect that this will continue to be prioritised. Another notable metric was the emphasis of harnessing unstructured data to improve investment outcomes. Again, this was consistent with increased move into private markets and the challenges that we all go around reporting and disclosures of that particular asset class. Across the globe what we also saw was Asset Owners are focusing on emerging technologies for data management, and in APAC, we saw 70% of Asset Owners in APAC note top three focus this year would be investing in Robotics, Cloud and AI to improve operational capabilities. This is again consistent with their priority for better integrating their technology platforms.

Garry [00:06:05] Great to see APAC leading the way in emerging technology, which will undoubtedly be a point of differentiation for these funds as they better access and make use of their data. Speaking of the need to harness unstructured data, let's move on to ESG, which is no doubt top of mind for Asset Owners around the world. What were some of the specific challenges that were called out in the study?

Babloo [00:06:30] Firstly, I think, APAC as you noted, has been certainly leading the way in terms of emerging technologies and the focus on this area continues to grow. Shifting to your question, understanding the current levels of ESG capabilities across regions and also the challenges around Data, starting with the ESG capabilities of Asset Owners in North America were more optimistic about their capabilities than their peers in APAC and in Europe. However, what we saw was approximately half of the AOs globally do not rate themselves as even somewhat strong across a range of important ESG areas, the categories include investment process, policy, governance, stewardship and reporting, and then obviously talent, which is a big one. On the data side, I think this really centered around poor data standards and inconsistencies across asset classes were key challenge in implementing ESG strategies and we've heard that many times. So, there's certainly some work to be done in this space, and we are constantly engaging both from an industry perspective, but also our clients how we can help them access data better.

Garry [00:07:32] It's certainly a topical area and hopefully we'll continue to see positive momentum. I'd like to quickly touch on remote working. As you mentioned earlier, one of the key threats to growth this year would be sustained work from home arrangements.

Babloo [00:07:46] Yes, an interesting one, indeed, what we saw a significant majority, in fact, 78% of respondents in North America noted that they expect all or most of this staff to continue to work from home for the foreseeable future. Apart from the usual concerns around collaboration, engagement, group thinking, et cetera, what we also heard was that cyber and information security risks. So, we expect firms to be taking actions in the areas of surveillance, increased security measures, Internet usage, to help mitigate some of these additional risks.

Garry [00:08:16] Before we finish up, why do you believe AOs see remote working as such a threat to growth, given people have been working from home for the best part of two years?

Babloo [00:08:26] Yes, again, great question, with the short-term disruption from the sudden switch in 2020 to entirely or a majority remote working based environment, while less than was expected at the time, nonetheless, and I think it's probably a bit of a hidden cost there is that it took up a lot of resources and energy that these institutions would rather have directed elsewhere. I think everyone reacted as they needed to technology and data-related operational improvement programmes we've been talking about, I mean, if the current environment becomes permanent, it will divert more resources. We see this in the research that more than half of AOs globally, 41% in APAC actually expect new increased regulation based on cyber security needs generated by more remote working and more than half of owners in the region expect this to require them to put more resources into cyber security training, technical infrastructure, new ways of working, these resources that they would otherwise be going into meeting their growth goals that we discussed earlier.

Garry [00:09:27] Some great insights there, Babloo and lots to consider. Babloo, thank you for your perspectives today and thank you for listening. You can find a range of market insights and thought leadership online at statestreet.com. We look forward to sharing new insights in our next edition.