Investing in the 21st century: Reorienting financial strategies to drive systems change. 2021. William Burckart and Steve Lydenberg, CFA. Berrett-Koehler Publishers, Inc.
Responsible investing, sustainable investing, impact investing, social investing, ethical investing, ESG (environmental, social and governance) investing – labels abound for the space where investors add non-financial considerations to traditional risk management and profitability. Now we can add one more term, “system-level investment,” the key theme of Investing in the 21st century: Reorienting financial strategies to drive systems change. The authors, William Burckart and Steve Lydenberg, CFA, are co-founders of TIIP, the Investment Integration Project.
The book characterizes investors as conventional, sustainable or system level. ‘Systems’ are classified as social, financial or environmental and include areas as diverse as consumer safety (social), fair and honest markets (financial) and climate stability (environmental). Conventional investors are described as aiming to “maximize returns in the shortest possible time.” Sustainable investors “seek ESG benefits alongside their financial returns,” but systems-level investors go further by setting “explicit goals for their systems impact.”
Burckart and Lydenberg persuasively argue that systemic problems have important implications for future returns. For example, they refer to a report by the Cambridge Center for Risk Studies that suggests social unrest associated with unemployment among “millennials” could reduce the value of US equity portfolios by up to 23% . Issues such as water quality and climate change can also affect investment outcomes or present systemic risk. Investors should take heed.
The book lays out a roadmap to becoming a system-level investor with six specific steps:
- Take advantage of advanced techniques.
These steps are described in some detail and examples of how best-in-class investors are currently implementing them are presented. Essentially, systems-level investing is an evolution of responsible or sustainable investing that considers not only how ESG factors affect an investor’s portfolio, but also how investors can affect the world at large, for better or worse .
21st century investment it may be more valuable to illustrate the theory with practical examples. It presents interesting case studies on how investors focus on long-term value creation (Norges Bank Investment Management), ESG integration (Allianz), and how to influence public policy (CalPERS and Aviva Investors). Clearly, what is possible depends on size. A “universal owner,” such as Japan’s Government Pension Investment Fund, can exert influence over outside managers and other investors in a way that small investors cannot.
A curiosity of the book is the scarcity of references to governance, the G in ESG. Standard ESG approaches can place governance on par with environmental and social factors. The International Corporate Governance Network relates governance to long-term value creation, sustainable economies, social prosperity and a healthy environment, interests shared by the authors of this book. The absence of government of 21st century investment it raises questions about how investors can be confident that social and environmental commitments will be met if the strength of governance is unknown.
Another doubt is the lack of concrete data on the size of the universe of sustainable investment. The reader will not learn from this book how well developed the worlds of sustainable and system-level investing are compared to conventional investing. There is no mention of the more than $100 trillion under management by signatories to the United Nations PRI (Principles for Responsible Investment) or how sustainable investing has reached $35.3 trillion in assets under management in five major markets in 2020, as reported by the Global Sustainable Investment Alliance (GSIA). Numbers like these would demonstrate that sustainable and system-level investing already constitutes an important part of the global investment universe.
Although the book concerns a flagship movement, much of what is discussed will already be familiar to many investors.
- System-level investment appears closely related to impact investment, which the GSIA defines as “investing to achieve positive social and environmental impacts”.
- Parts of the six-step roadmap echo other frameworks, such as the PRI’s “Investing with SDG Results” (Step 1: Identify results, Step 2: Set policies and targets, etc.).
- Many of the techniques described can be found in a standard ESG toolbox. The authors labeled the actions undertaken by New Zealand Superannuation as ‘Diversity of focus’ but the mix of ESG integration, manager monitoring, research, engagement, industry collaboration etc. reads as a standard collection of sustainable investment tools.
In addition, little attention is paid to the difficulties experienced by many sustainable investors, such as data inconsistency and the problem of “greenwashing”.
This book deals with important topics. One of its strengths is that it clearly articulates why non-financial considerations should be included in investment analysis. In addition, it presents a series of tools that can facilitate the integration of these considerations into the investment decision-making process and help the investment community play an important role in improving social and environmental problems. These tools may be familiar to experienced sustainable investors, but the book nevertheless admirably describes an evolution in investing that is likely to have a profound impact on the 21st century world.
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All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.
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