Investment stewardship for system-level impact

How investors can nurture the systems we all rely on for our day-to-day lives and long-term economic growth

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Over the last few years, dams owned by the Brazilian mining company Vale burst, destroying nearby towns and killing over 250 workers and residents. These were massive human tragedies, and Vale and other companies involved were subject to litigation and sanctions. 

But they also sparked a global movement to improve the safety of mining from a group of investors. Led by the Church of England Pensions Board, which owns stock in Vale, they created a coalition of investors that demanded a “new safety system to be independent of companies.” 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. Unsafe dams have been closed and the families of victims compensated.

The Pensions Board and other members of the coalition could have focused their stewardship on Vale and left it there. But instead they decided to look at the entire mining system and determine what changes they could make using their clout as investors.

The Pensions Board is not alone in its approach to stewardship, or what we call “system-level investing.” In our new book on 21st Century Investing: Redirecting financial strategies to drive systems change we examine this phenomenon more fully and how this new evolution in responsible investing recognizes the interconnected nature of our social, financial, and environmental systems. This growing movement within investing and the business sector recognizes the need to care about and nurture the systems we all rely on, not only for our day-to-day lives but for the long-term growth of our economic system.

Active stewardship with a system-level lens protects and enhances the value of investors’ assets by encouraging social and environmental practices that support sustainable financial performance. It acknowledges an investor’s obligations to consider financial implications together with ethical implications, thereby transcending today’s market-based, “buy/sell” discipline.

High-level investment associations are increasingly urging investors to take this system-level approach. Financial-industry regulators, for example, have issued guidance for investors that includes systemic risks. The Financial Reporting Council’s UK Stewardship Code 2020, which went into effect January 1, 2020, directs investors to “identify and respond to market-wide and systemic risks” and to create “long-term value… leading to sustainable benefits for the economy, the environment and society.” [Emphasis added]

The Principles for Responsible Investment (PRI) recently asked its investor-members to pursue what it calls “Active Ownership 2.0,” stressing the importance of investors’ stewardship of their assets broadly and the crucial role of collaboration among investors in that stewardship. Regarding systems, the PRI is explicit:

Systemic issues require a deliberate focus on and prioritization of outcomes at the economy or society-wide scale. This means stewardship that is less focused on the risks and returns of individual holdings, and more on addressing systemic or ‘beta’ issues such as climate change and corruption. It means prioritizing the long-term, absolute returns for universal owners, including real-term financial and welfare outcomes for beneficiaries more broadly.

Our work in addressing this challenge draws on the experiences of major industry bodies and investors who are increasingly considering stewarding their assets in this way. In May 2016, for example, the International Corporate Governance Network (ICGN), which represents asset owners and managers from 50 countries with total assets of some $54 trillion, promulgated its Global Stewardship Principles, which call on its members to “build awareness of long-term systemic threats.” Similarly, The Pensions Board developed a Stewardship Implementation framework that sets forth its strategies for “systemic or strategic interventions that will have a wider impact than standard corporate engagement.”

The Pensions Board has also focused on the systemic risks of climate change, creating an “open access” climate benchmarking tool to assess the preparedness of top publicly listed companies for a low carbon economy and taking a leadership role in investor coalitions, including the Institutional Investors Group on Climate Change (IIGCC) and Climate Action 100+.

Another indication that a focus on systems is moving from the narrow niche of classical sustainable investing to mainstream investing is a report from the CFA Institute on “The Future of Sustainability in Investment Management,” which was published in December, 2020. The report advises moving beyond traditional ESG practices to system-level thinking: “Systems theory is more than just an extra discipline to be studied; it is as much a way of thinking and communicating that needs a cultural grounding. The key principle is that there are multiple interconnected factors that drive the investment ecosystem that need to be recognized. This…calls for balance — the balance to our thinking that does not seek to oversimplify complex elements.” 

This approach expands the investor’s horizon line beyond just the financial to encompass a holistic care for social and environmental systems. It is a logical step for those accepting their obligations to steward and preserve the broad frameworks within which their investments take place. 

All of which raises the big question of how exactly investors should go about addressing the major challenges of the day on a fundamental, system-level. Our company, The Investment Integration Project (TIIP), has been seeking to answer this question for the past five years. Through our publications over the years and recently released book we can now show what it means to manage system-level risks and rewards, why it is imperative to do so now, and how to integrate this new way of thinking into current practice, making the task of taking a system-level approach to investment practices and stewardship both understandable and practical.

Put simply, the evolving nature of risks and opportunities, mixed with pressure from typically conservative regulators and trade associations, has created the conditions necessary for investors to elevate their stewardship to take action on system-level considerations. The Church of England Pensions Board and others are models for what systemic stewardship can be. Applying a system-level investing approach can be challenging, but because others are leading the way the path forward is increasingly clear and easy to follow. 

William Burckart leads TIIP (The Investment Integration Project) and is a fellow of the High Meadows Institute. 

Steve Lydenberg is the founder of TIIP and a partner at Domini Impact Investments.

William will be talking about systems level investing at a special, free to attend RI book launch author Q&A webinar on July 7