The book characterizes investors as conventional, sustainable, or system-level. “Systems” are classified as either social, financial, or environmental, and include areas as diverse as consumer safety (social), fair and honest markets (financial), and climate stability (environmental). Conventional investors seek “maximum returns in the shortest time possible.” Sustainable investors “seek ESG benefits alongside their financial returns,” but systemic investors go further by setting “explicit targets for their impacts on systems.”
Burckart and Lydenberg argue convincingly that systemic problems have a major impact on future returns. For example, they point to a report from the Cambridge Centre for Risk Studies that implies social unrest related to unemployment amongst millennials could reduce the worth of US equity portfolios by as much as 23%. Issues resembling water quality and climate change also can impact investment results or pose a systemic risk, and investors should take this under consideration.
The book describes in six concrete steps turn out to be a system investor:
- Use advanced techniques.
These steps are described intimately and examples of how world-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 aspects impact an investor’s portfolio, but in addition how investors can impact the world at large, for higher or for worse.
is maybe most useful when the idea is illustrated with practical examples. Interesting case studies are presented on how investors concentrate on long-term value creation (Norges Bank Investment Management), integrate ESG (Allianz) and influence public policy (CalPERS and Aviva Investors). What is achievable will depend on size, after all. A “universal owner” resembling Japan’s Government Pension Investment Fund can exert influence over external managers and other investors in ways in which small investors cannot.
What is strange concerning the book is the small variety of references to governance, the G in ESG. Standard approaches to ESG can put governance on a par with environmental and social aspects. The International Corporate Governance Network links governance with long-term value creation, sustainable economics, social prosperity and a healthy environment – interests that the authors of this book also share. The absence of governance raises questions on how investors can make sure of compliance with social and environmental obligations when the strength of governance is unknown.
Another criticism is the shortage of hard data on the dimensions of the sustainable investment universe. The reader won’t learn from this book how developed the world of sustainable and system-wide investing is in comparison with that of conventional investing. The greater than $100 trillion managed by the signatories of the United Nations PRI (Principles for Responsible Investing) will not be mentioned, neither is the indisputable fact that sustainable investments reached $35.3 trillion in assets under management in five major markets in 2020, as reported by the Global Sustainable Investment Alliance (GSIA). Figures like these would show that sustainable and system-wide investing already represents a major a part of the worldwide investment universe.
Although the book is predicated on a flagship movement, many investors will already be aware of much of what’s discussed in it.
- Systems-level investing appears to be closely related to affect investing, which the GSIA defines as “investing to achieve positive social and environmental impacts.”
- Parts of the six-step roadmap reflect other frameworks, resembling the PRI’s “Investing with SDG Results” (Step 1: Identify results, Step 2: Set policies and targets, etc.).
- Many of the techniques described are included in an ordinary ESG toolkit. The authors label New Zealand Superannuation’s measures as “diversity of approach”, but the mixture of ESG integration, manager monitoring, research, engagement, industry collaboration, etc. reads like an ordinary set of sustainable investment tools.
Little attention can also be paid to the difficulties faced by many sustainable investors, including data inconsistency and the issue of “Greenwashing.”
This book covers necessary topics. One of its strengths is that it clearly sets out why non-financial considerations needs to be included in investment evaluation. In addition, it presents a lot of tools that may facilitate the mixing of those considerations into the investment decision-making process and help the investment community play a vital role in alleviating social and environmental problems. These tools could also be familiar to experienced sustainable investors, however the book nevertheless admirably describes a development within the investment field that’s prone to have a profound impact on the twenty first century world.
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