Impact Voices | April 21, 2022

Where we are and where we’re going in the transition to system-level investing

William Burckart and Steve Lydenberg
Guest Author

William Burckart

Guest Author

Steve Lydenberg

When we started The Investment Integration Project (TIIP) back in 2015 we did so with a relatively straightforward idea: we wanted to show investors that everything – from the environment to healthcare to social unrest to the financial markets – is interconnected. 

Our hope was that investors would realize that understanding this interconnectedness is not only good for global sustainability and well-being, but also for their bottom lines.

The name we gave this thinking was “system-level investing.” Did the term roll off the tongue easily? Not quite. But we wanted to root this thinking in the world of systems dynamics and make clear that when investors only think about portfolio returns (say, carbon emissions avoided or jobs created), they stop short of contending with social and environmental challenges that are fundamentally destabilizing. 

These new challenges are systemic risks in a highly interconnected and complex world, threatening long-term investment returns across all asset classes in ways that traditional risk management cannot cope with.

We spent the intervening years building out the concept, setting basic principles and frameworks for action, and evaluating over 100 investors who have begun to adopt system-level thinking. We found that those successfully tackling systemic risks have several common approaches: 

  • They invest in portfolios entirely targeted or heavily weighted toward social and environmental solutions.
  • They go beyond portfolio construction and security selection to include the adoption of new techniques that are explicitly designed to help investors influence global systems and limit broadly occurring undesirable outcomes from the outset.
  • These new techniques stress collaborative action, building shared knowledge bases, setting industry standards, and creating a rising tide of investment opportunities for all investors. 
  • They focus on key leverage points that can strengthen overall systems, enhance their resilience, and ensure their long-term sustainability.

ESG to system-level

Seven years later, it is clear a transition is underway, from ESG integration and impact investing towards a great focus on managing systemic risks and opportunities.

Established players like Sinclair Capital, Ceres, the Stockholm Resilience Center, Majority Action, The Cambridge Centre for Risk Studies, and countless others now use the systems vocabulary and are making important contributions to theory and practice. 

The CFA Institute, the global association of investment professionals, also echoes this sentiment. In a report from 2020, it acknowledged the multiple interconnected factors that drive the investment ecosystem and advised readers to move beyond traditional ESG practices and into system-level thinking.

Industry associations like SHARE Canada, UN-backed Principles for Responsible Investment, ICGN, and Toniic are developing research, tools, and programming meant to support investor integration of system-level investing. 

The Interfaith Center on Corporate Responsibility has gone so far as to launch a member-led working group focused on systemic stewardship.

New players like the PreDistribution Initiative, Workforce Disclosure Initiative, The Shareholder Commons, Preventable Surprises, r3.0 and others are tackling specific dimensions of system-level investing, with focuses on particular systemic issues, investment structures, corporate engagement, data, measurement and more.

Regulators are getting in on the action, too. Awareness of systemic issues, and the urgency needed to address them, is reflected in the heightened concern by investors for responsibility for the stewardship of their assets—a concern that policy makers and corporate governance advocates are increasingly reflecting as well. 

For example, in the UK Stewardship Code 2020, Principle 4 directs asset owners and managers to “identify and respond to market-wide and systemic risks to promote a well-functioning financial system.” New regulatory developments in the E.U. and U.S. are similarly nudging investors in this direction.

Specific initiatives aimed at driving collective engagement have also taken shape. Climate Action 100+, a then unprecedented initiative started in 2017 now includes over 320 investors (including some of the largest in the world) focused on pressuring the world’s largest carbon-emitting corporations to reduce their carbon footprint. The recently announced Nature Action 100 aims to follow suit, but instead of focusing on the systemic issue of climate change it will engage companies and policymakers deemed to be systemically important to reversing nature loss by 2030.

Another effort, the Task Force on Climate-related Financial Disclosures, has prompted investors and corporations to engage in scenario analysis (a key feature of systems thinking) when it comes to climate change. 

More recently, the Taskforce on Nature-related Financial Disclosures and Task Force on Inequality-related Financial Disclosures have emerged and are similarly building systemic risk management and disclosure frameworks focused on nature and inequality related risks respectively.

Taking action

We’re now seeing the outcomes of this ecosystem building in terms of tangible efforts by investors. After several dams controlled by the Brazilian mining company Vale burst in the span of a few years, destroying nearby towns and killing over 250 workers and residents, the Church of England Pensions Board, which owns stock in Vale, created a coalition of investors to demand new global safety standards in the mining industry, to be enforced by an independent body. 

As a result, Vale and other global mining companies agreed to undertake annual audits of their dams, implement new safety standards, and commit to public reporting.

Another, the UAW Retirees Medical Benefits Trust, continues to advocate for more comprehensive standards and data disclosure around income inequality. The Trust houses the Human Capital Management Coalition, which is supported by 32 institutional investors with US$6 trillion in assets under management. 

In 2022, the U.S. Securities and Exchange Commission amended its rules for how public companies disclose workforce information in response to a petition filed by the Coalition in 2017.

Foundations are also adopting a system-level focus. The Guys’ & St. Thomas’ Foundation is leveraging its investments to drive policy change to improve health and well-being. For example, the foundation’s investment in the SMASH app (Save Money and Stay Healthy), which offers 13-to-24-year-olds a 20% discount on healthy food choices at food-to-go retailers, was made with the intention of reducing childhood obesity and improving health, particularly in lower income areas.

If successful, the solution could be scaled through a similar 20% VAT reduction on healthy foods. In addition, the foundation is working with ShareAction to develop the Long-term Investors for People’s Health program to encourage investors to consider health, and the social factors that drive it, in their investment decision making.

Awareness to adoption

As we reflect on the transition we see from our vantage point at TIIP – particularly as we undergo our own leadership transition – we are emboldened by what now appears possible. We’ve spent the past year conducting an industry needs assessment that has helped to clarify investor awareness and readiness to adopt system-level investing. The results do suggest a lot of work ahead of us to drive greater traction – with our new turnkey solution and community of practice aimed at speeding this process up – but the prospect of industry transformation no longer seems beyond reach.

Making the transition will require the hard work and dedication of an entire ecosystem of champions for system-level investing and progress will likely be incremental at the outset. Rest assured, though, the pieces of the puzzle are falling into place.

William Burckart is CEO of The Investment Integration Project (TIIP) and a Fellow of the High Meadows Institute. Steve Lydenberg is the Founder of TIIP and serves as Partner, Strategic Vision of Domini Impact Investments.