System change investing: High impact, high return

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The sustainable/responsible investing (SRI) market is over $30 trillion and growing faster than traditional investments. Over the past 20 years, SRI and the sustainability movement in general have provided large benefits to business and society. But in spite of this good work, environmental and social conditions are declining rapidly in many areas. Clearly new approaches are needed.

Nearly all SRI and corporate sustainability strategies focus on changing companies and addressing symptoms, such as climate change, poverty and other major environmental and social challenges. This work is essential, but not enough. Root causes must be addressed to resolve the major challenges in the U.N. Sustainable Development Goals (SDGs).

Reductionist thinking and resulting flawed systems are the primary root causes. Flawed economic and political systems unintentionally compel companies to degrade the environment and society. Sustainability cannot be achieved unless the cause of unsustainability is effectively addressed.

A growing number of financial institutions are addressing system change. Approaches include assessing the portfolio, sector and economy-wide impacts of investing, addressing the SDGs, assessing impacts relative to planetary limits and science-based targets, investing in ecosystem restoration, and addressing poverty, gender equality and other social issues.

These approaches are highly beneficial, but still mainly focused on symptoms. For example, the solution to climate change and deforestation largely does not involve addressing these problems directly. It requires resolving the systemic factors that created the problems in the first place.

SCI represents the first investment approach that has the potential to achieve the SDGs because it focuses on root causes.

Systems change investing (SCI) switches the focus of SRI from company change and symptoms to system change and root causes. Over the past 20 years, investor interest through SRI encouraged nearly all large companies to implement sustainability strategies. SCI uses the same proven approach. The process involves rating companies on system change performance, and then using this research for positive screening, negative screening, engagement and other ESG/SRI strategies.

SCI represents one of the most powerful short-term system change strategies available to humanity. It uses investing to engage the financial and corporate sectors in the most important sustainability issue. SCI represents the first investment approach that has the potential to achieve the SDGs because it focuses on root causes.

A large and growing number of investors want their investments to benefit society. SCI can provide the highest possible sustainability benefits. This will attract new investments and position asset managers as global SRI leaders. SCI also can substantially increase investment returns. It identifies systemic risks and opportunities that are not assessed by traditional financial and ESG analysis and provides strong indicators of superior management and stock market potential.

System change traditionally has not been the responsibility of the financial and corporate sectors. But flawed systems are causing large problems for business and society. As has occurred throughout history, all flawed systems change, usually by collapsing. Keeping current systems the same is not an option. Either we will change them voluntarily or nature and reality will change them involuntarily, probably through collapse.

COVID, growing political division and many other problems strongly indicate that our flawed systems already are in the process of changing. We probably do not have much time left for voluntary system change. Investors and companies are far better off taking a seat at the system change table and helping to guide the process in ways that protect business and society.

How to do SCI

SCI evolved from pioneering ESG experience. In 2003, as the head of research for the largest ESG research company, I saw that no company could come close to fully eliminating negative environmental and social impacts. If they tried, their costs would go up and they would put themselves out of business. This is a system problem, not a company problem.

I estimated that system change was at least 80 percent of the sustainability solution but getting nearly 0 percent of the attention in the SRI area. I realized that investing could be used to drive system change, like it was being effectively used to drive corporate sustainability. As a result, in the same year, I developed the first model for rating corporate system change performance. But it soon became clear that much more information about system change was required to do SCI effectively.

SCI rating is more complex than ESG because the context or frame of reference is much broader. The frame of reference for ESG largely is mitigating negative corporate impacts. The SCI frame of reference ultimately is the whole Earth system and its sub-element human society. I used whole-system thinking to identify the systemic changes needed in all major areas of society, and published this research in the Global System Change books.

Once system change overall is clear, the optimal corporate role in driving it can be identified. Aspects of this become metrics in system change rating models. There are many ways to do SCI. I developed several models, including introductory, action-focused and whole system approaches. To illustrate, metric categories in a whole system SCI model include context, business consciousness, ESG strategy, system change strategy, mid-level system change, high-level system change, systemic risks, systemic opportunities and results.

SCI will face the same types of challenges that ESG faced 20 years ago. These include limited data, proxy use, showing financial relevance and resistance to changing profitable systems. These can all be overcome with ESG experience and system change knowledge.

In sum, SCI represents the next generation of ESG. It enables nearly all equity and debt investments to become system change investments. It is perhaps the most powerful short-term driver of system change. SCI provides substantial profit, growth and leadership opportunities for the financial community.

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