Universal owners, such as pension funds, can drive systemic change by leveraging their significant influence and resources to address risks that cannot be mitigated through diversification alone, Sweden's AP7 has suggested. 

AP7's report on universal ownership explained that universal owners hold a representative slice of the global economy, which makes them particularly exposed to system-wide disruptions that affect multiple sectors and markets.

However, it suggested that, due to their highly diversified and long-term portfolios, they are also uniquely positioned to drive systemic change by addressing risks that cannot be mitigated through diversification alone, such as climate change, biodiversity loss, and global inequality. 

AP7 also pointed out that these risks not only threaten individual investments but also undermine portfolio-wide value and long-term financial returns, pointing out that asset owners with large diversified portfolios are exposed to systemic risks, affecting overall portfolio value. 

Given this, it argued that it is within pension funds' fiduciary duty to address such risks.

In particular, the paper suggested that, by adopting a root cause approach, investors can identify where and how to direct their stewardship efforts.

"Systemic-focused stewardship entails wide brush strokes, such as seeking to impact policy, standards and sector-wide change," AP7 explained.

"Fundamentally, it is a move away from engaging individual companies on single issues, towards taking a portfolio-wide perspective."

The group also suggested that, in order to amplify the effects of stewardship tools, investors could consider collaborating strategically with other investors, aligning director votes with stewardship goals, publicizing their expectations and their voting intentions.

It also encouraged investors to engage with asset managers and extend stewardship to its bond holdings, including sovereigns. 

However, AP7 clarified that, while stewardship activities to discourage harmful practices are pivotal, universal owners would also do well to seek to invest in solutions too. 

The report is intended to serve as inspiration for asset owners that are looking to align their investment strategies with broader societal goals while fulfilling their fiduciary duty to beneficiaries.

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