Institutional investors are facing a world where geopolitical, economic and environmental risks no longer arrive in isolation, but collide and compound one another, according to new research from Ortec Finance.
The financial risk and return management specialist argues that this growing entanglement of threats, often described as a “polycrisis”, carries significant implications for how investment decisions are made and how portfolios are built to withstand shocks.
In a new whitepaper, Ortec Finance examines how tail-risk events, including extreme polycrisis scenarios, could affect institutional investors, and sets out guidance for strengthening risk management frameworks so that investors can better prepare for, respond to and build resilience against an increasingly complex risk landscape.
Ortec Finance defines a polycrisis as a non-linear, widespread event capable of triggering cascading, profound and far-reaching impacts across global financial markets. Although such episodes are rare, the firm notes they are not without precedent, and have historically met a consistent set of criteria: deep uncertainty, interconnectedness, environmental shocks and systemic impact across markets and institutions.
Crucially, Ortec Finance warns that a polycrisis occurring in today’s environment would likely be significantly intensified by the pace of digital and technological change, a factor that has reshaped how quickly shocks can propagate through interconnected financial systems compared with previous crises.
To help investors navigate this landscape, Ortec Finance points to stochastic scenarios grounded in realistic views and assumptions as a vital starting point for polycrisis preparedness. However, the firm cautions that the fundamental uncertainty underpinning a polycrisis may not be fully captured through stochastic modelling alone.
Instead, Ortec Finance recommends pairing stochastic approaches with deterministic, narrative-based scenarios, arguing that combining the two methods gives investors a fuller picture and allows them to anticipate and prepare for profound outcomes in a more timely way.
For more, read the full whitepaper here.
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