Investors Assessing Systemic Impact

Financing

For the past five years, The Investment Integration Project has struggled to envision what it would mean for all investors to be sustainable investors, for responsible and impact investment to transcend niche markets and   become a de facto discipline across all asset classes and product lines, to be an integral part of the investment process and fully realize the potential for finance to benefit individuals and society simultaneously.

Our argument has been straightforward. Investors depend on stable social, financial, and environmental systems for sustainable returns. Asset owners and managers are impacted by the health of these systems and their decisions impact these systems in return. Today, finance is too large and powerful to sit on the sidelines, pretending that it is a disinterested spectator that cannot and should not manage these impacts.

Starting in 2015, we have articulated the case for a system-focused approach; identified those best practices that can help investors intentionally manage their systemic risks and opportunities; described and categorized tools designed for this purpose; and joined in tackling measurement and assessment issues. All the while, we have watched while sustainable investment has continued to gain traction in the increasingly complex, interconnected, and interdependent world of this century.

As more sustainable investment products come to market, distinguishing those doing credible jobs from those that are “greenwashing” has become a challenge. This task is now effectively an emerging component of due diligence.

Our most recent publication, Assessing System-level Investments, seeks to understand how to assess the performance of asset owners and managers seeking to achieve systemic influence: how to measure contributions to the management of systemic risks and opportunities. It requires asking uncomfortable questions. Are firms consistent in their commitments to sustainability across the full range of actions and outcomes? Are they willing to exercise judgment as well as analyze data? Do they place a value on the inherent worth of social, financial, and environmental frameworks within which they operate? Can they balance the demands of the short-term with the benefits of the long run?

To answer these questions in the context of daily practice, to assess whether investors intentionally and effectively contribute to system-level change, this publication proposes six dimensions across which they can be evaluated.

Beliefs. Has the investor clearly stated their beliefs about the nature and importance of social, financial, and environmental systemic risk management? Such belief statements set a benchmark against which an investor’s actions and outcomes can be measured and their consistency to stated purpose be assured.

Justifications. Has the investor adequately justified their choice of those challenges on which to focus? Simply put, the choice must be one that impacts investments across all asset classes. In addition they must have the expertise and resources to act at a system level. This high bar assures that idiosyncratic concerns and potential conflicts of interest do not become confused with systemic challenges.

Tools. Has the investor chosen tools designed to achieve system-level impact? If they do not understand the nature of systems dynamics—how change takes place—they have little chance of selecting tools that exercise influence. These tools act at system levels because, among other things, they build alliances for collaborative action, advocate for public policies, and solve once and for all systemic challenges rather than profit from their perpetuation.

Leverage Points. Has the investor applied these tools effectively at key leverage points within particular systems? They need to understand where they can gain maximum leverage given the time and effort they will expend. These leverage points in effect become “themes” that guide the investor toward actions with particular influence. A skillful butcher cuts through the joint, not the bone. If no market exists for organic products, efforts to shift farmers’ practices remain futile; increase consumer demand and change follows with relative ease.

Alignment. Has the investor addressed the alignment of interests among the stakeholders within a system? Diverse and often conflicting motivations typically drive the behavior of stakeholders in complex systems. Without alignment of interests among them, political conflicts will impede action. Confronting climate change is as much a political problem as a technological one. Reining in pandemics requires effective communications as well as sound healthcare policies. Making sure stakeholders start from the same premise facilitates progress.

System-level progress. Finally, has progress occurred at the system level and, if so, has the investor contributed substantially to it? System change involves four stages: initial expressions of interest by key stakeholders; actions aimed at actual change; demonstrable influence resulting from these actions; and, ultimately, a measurable change in the ability of the system to produce consistently desirable outcomes. Generating desirable outcomes from the start is the goal, rather than dealing with problems after the fact. An investor envisioning that goal—with a theory of change on how to move from here to there—can make meaningful progress possible.

System change may be difficult, but understanding who is doing a good job in bringing it about is achievable. An intentional focus on relevant challenges, use of tools designed to create systemic shifts, actions at leverage points well chosen, shared goals, and honest evaluations of whether the system itself is moving toward those ends are key to assessing system-level investments.

Steve Lydenberg has been active since 1975 in social and environmental performance measurement He is TIIP’s Founder and CEO, also serves as Partner, Strategic Vision of Domini Impact Investments where he provides strategic vision and direction to guide the firm’s policies, procedures, and daily practices. 

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Investors Assessing Systemic Impact