21st Century Investing: Foundations of System-level Investing: Exploring a new investment paradigm for our times.

By Michael Greis posted 12-16-2021 13:38


Mainstreaming Sustainable Investing, the tagline for our CFA Boston Sustainable Investing conferences since we began them in 2013, has moved from aspiration to reality.  Rapid growth and widespread adoption of sustainable investing - as with any innovation - has generated both new challenges and new opportunities.   While much attention has justifiably been given to addressing the challenges - issues like greenwashing, data quality and standards - the further innovation of the field has received much less attention. 

The CFA Boston Sustainable Investing initiative team has worked to address that gap with an event series on systems-level investing, a potentially transformative development.  Industry pioneer and long-time CFA Boston member Steve Lydenberg developed the ideas behind system level investing that he and his co-author Bill Burckart laid out in their book 21st Century Investing.  After our recent session on Integrating System-Level Investing into Practice Management featuring Bill and four local practitioners, we invited Bill to write an article introducing system level investing to our membership.  His article below includes comments from our Boston-area practitioners.  


By William Burckart

As world leaders wrapped up the crucial COP 26 meeting in Glasgow, Scotland, to discuss ways to accelerate action on the Paris Agreement and UN Framework Convention on Climate Change, investors continued to pour money into the booming market for sustainable investment products and solutions.  

Over $51.1 billion flowed into sustainable funds in 2020, more than twice 2019’s total of $21.4 billion, according to Morningstar. And in its 2020 biennial report, the US SIF Foundation, an industry association focused on the promotion of sustainable investing, reported a 42% increase in sustainable investment assets to over $17 trillion, representing about a third of all assets under professional management.

To explore more deeply this growing investment approach, members of the CFA Societies of Boston, New York, and Philadelphia who collaborate on sustainable investing programs recently invited me and local investment practitioners from their communities to join a four-part series on system-level investing, an advanced form of sustainable investing.  The CFA Boston session (see the replay here) focused on the advisor community and featured Kim Gluck, CFA, from Boston Trust Walden, Dune Thorne from Brown Advisory, Rick Smyers from Fidelity Labs and Nakia Maddox-Eubanks from BNY Mellon Asset Management.  

The collaboration highlights that these ideas are gaining widespread interest.  The CFA Institute, in its December 2020 report, “The Future of Sustainability in Investment Management,”  advises moving beyond traditional ESG practices to system-level thinking: “Systems theory is more than just an extra discipline to be studied. 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.”

“In the last few years, we have seen sustainable investing evolve from a being a niche to being very much part of the mainstream, “said Rick Smyers of Fidelity Labs. “In decades past, there were relatively few advisors who offered sustainable investments. In the future, there may only be a few who do not.”

As the co-author, with sustainable investing trailblazer Steve Lydenberg, of 21st  Century Investing – Redirecting Financial Strategies to Drive Systems Change, I’ve also seen how institutional investors and wealth advisors can go beyond conventional and sustainable investing to address complex problems such as income inequality and climate change on a deep, systemic level.


System-Level Investing Defined

System-level investing is the intentional consideration by investors of the bigger-picture societal, environmental, and financial system context of their investment decisions. As Steve and I argue in 21st Century Investing, investors need to consider the factors that make investment returns possible in the first place: healthy economic, social and environmental systems that are necessary for financial returns on capital.

System-level investors think beyond “What are the carbon emissions and working-condition consequences of our investment in this enterprise or fund?” and instead ask “What can we do, as an individual investor and as a collective investment community, to address climate change and labor issues and, in turn, help to foster an environment and society that promotes the long-term growth and solvency of our assets?” They do so not at the expense of long-term investment prospects, but rather to support them.

“One of the more exciting things about system-level investing is that it helps us think about client portfolios in the aggregate,” said Brown Advisory’s Dune Thorne “A ‘traditional’ impact mindset, for example, might involve a carve-out impact portfolio with separate investment objectives from a client’s core investments. Whereas with a system-level mindset, we can think about financial and impact results in the aggregate, across the entirety of that client’s investments—which is really what they care about, at the end of the day.” 

“For over four decades, we have used active ownership strategies to improve ESG practices at the companies in which we invest on behalf of our clients,” added Kim Gluck of Boston Trust Walden. “We engage companies in numerous ways, from direct dialogue with company executives to filing shareholder proposals and participating in broad-based coalitions. Our engagement efforts continue to pay off, with companies demonstrating important progress on critical issues, including board diversity and climate lobbying transparency.”


Investing in an Interconnected World—6 Steps 

So, what can investors do? How can they transition from conventional and sustainable investing to incorporating a system-level approach? Here are six steps from TIIP’s research that can help investors move forward on the system-level investing journey.

1) Set goals. Investors need to be clear about goals. Individuals managing their own accounts and institutional investors stewarding the funds of others—whether they like it or not—are either making systemic challenges better or worse. And they need to be on the positive side of that equation. 

2) Determine the system-level challenge to focus on. Investors must then determine which challenges might require a system-level approach. Each issue needs to have consensus about its importance, relevance to investors across their asset classes, effective means for investors to exercise influence, and uncertainty that cannot be dealt with via conventional investment strategies.

3) Allocate assets. Investors should know the social and environmental purpose of each asset class. What role can each most effectively play in solving systemic challenges and creating opportunities for all? Investors should ensure that the holdings in their portfolios take full advantage of the purposes for which each asset classes was designed. 

4) Extend conventional investing tools. Institutional investors can extend their routine practices on investment beliefs to encompass those dealing with social and environmental systems, vote proxies to exercise systemic influence, incorporate industry-wide, issue-specific criteria into active management to address systemic concerns, and create customized models that envision systemically new approaches for indexed, passive funds. Individual investors can identify asset managers that implement credible practices in these areas and are willing to integrate the specific systemic risks and opportunities on which these individuals are focused. 

5) Leverage advanced techniques. Investors need to step out of their comfort zones. Institutional investors can do this by collaborating with peers and other stakeholders to apply pressure on whole industries to address systemic issues, supporting governmental regulations of the social and environmental landscape, exercising influence in aligning the interests of conflicting stakeholders within systems large and small, and creating new financial markets that solve persistent challenges, not simply profit from them. Individuals lack the opportunities for direct participation in many of these approaches but can request the funds and pension plans in which they are participants to employ these techniques themselves.  

6) Evaluate results. All investors should also expect more than the usual quarterly investment reports. Individuals and institutions should ask what managers have done to influence systems positively. They can evaluate managers’ actual goals for a system, the actions they have taken, the changes to which they have contributed, and the progress that the system itself has made.

            Some in the investment community today have already set off down the road to a genuinely system-oriented approach, but few are yet fully committed. Those making progress adopt tac- tics such as investing in portfolios entirely targeted or heavily weighted toward social and environmental solutions and advocate for public policies that reduce systemic risks and advance the health and resilience of crucial systems. They engage at industry levels to set standards and norms. They collaborate with others to amplify their influence. And they set clear goals for system- level (not simply portfolio-related) progress and report on their contributions to the achievement of these goals.

            More investors need to make that commitment.  It’s time for a new era of investing with a vision that expands beyond individual returns and beating the performance of your neighbor. Most people don’t trust Wall Street anymore. By calling this approach system-level investing, we want to be clear: a primary responsibility of 21st century investors—whether individuals, families, or institutions—is to ensure that their investments intentionally support the health and resilience of crucial systems, reduce systemic risks, and promote opportunities for all.


            William Burckart is the President of The Investment Integration Project (TIIP), an applied research and consulting services firm that helps investors manage systemic societal and environmental risks. Mr. Burckart is also a fellow of the High Meadows Institute. He previously served as a member of the advisory council of the Investments & Wealth Institute’s WealthBoard 100 and a visiting scholar to the US Federal Reserve. He is the co-author of the book 21st Century Investing: Redirecting Financial Strategies to Drive Systems Change (Berrett-Koehler, 2021).