SYSTEM-LEVEL INVESTING

Identifying, measuring, and managing environmental, social, and financial system risks and investing in solutions to systemic problems.

Why should investors care about environmental, social, and financial systems?

Investment occurs in a world built upon rich frameworks of natural resources and a highly sophisticated societal infrastructure including a well-functioning financial system – all of which have been built up over decades, centuries, and even millennia in the case of natural resources. The financial community can help to preserve and enhance these systems, promoting healthy long-term returns; or it can undercut and destabilize them, jeopardizing investors’ bottom lines.

What is system-level investing?

System-level investing is the intentional consideration by investors of the bigger-picture environmental, social, or financial system context of their security selection and portfolio construction decisions.

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.

What exactly does TIIP mean by environmental, social, and financial “systems”?

We are referring to the three overarching systems that the financial community relies on for profitable investment opportunities and that support stable business operations and functioning financial markets.

ENVIRONMENTAL

Profitable investment depends on the health of the physical environment as a source of wealth generation necessary for future prosperity

Natural resource depletion, climate change, and decreased access to fresh water are among those systemic environmental issues that threaten investors’ futures

SOCIAL

group

Societies provide the foundational cultural and legal structures upon which businesses thrive

Income inequality, poverty, poor health, and dangerous working conditions – among other things – threaten societies’ health and the businesses that depend on it

FINANCIAL

The global financial system consists of an interlocking network of laws, regulations, institutions and customs that enable the smooth functioning of markets

This system and the investors that depend on it cannot thrive without stability, trust, credibility, inclusiveness, and transparency

How does system-level investing differ from sustainable investment approaches (e.g. ESG integration)?

An increasing number of investors are integrating environmental, social and governance (ESG) considerations into investment analyses and pricing valuation of individual securities. These “sustainable” investors understand the risks that poorly managed ESG considerations pose to their portfolios. Many also understand that their investment decisions have important environmental and social consequences that affect the financial community and that they can profit from investing in solutions to environmental and social problems.

System-level investors aim to generate measurable influence on the broad environmental, societal, and financial systems within which they operate. They deliberately—or intentionally—employ a combination of conventional investment strategies and other system-level investing tools to address big global problems. Ultimately, system-level investors hope to create a more sustainable world, a world that supports their long-term investment prospects.

What does system-level investing look like in practice?

Investors integrate system-level investing into their investment strategies in ten primary ways, dubbed the “ten tools of intentionality.” Here we provide examples of four of the tools in action.

Self-organization
Trillium Asset Management has played a leading role in founding organizations that help advance sustainable and system-level investing. It was a founder of US SIF—originally the Social Investment Forum—which became the model for other Social Investment Forums around the world. It helped lead the promulgation of the Ceres Principles, which led to the development of the environmental advocacy organization Ceres and the Global Reporting Initiative.
Locality
Locality
Caisse de dépôt et placement de Québec manages the pension and insurance funds for more than 30 organizations in Quebec. Its mission focuses on achieving competitive returns and contributing to Québec’s economic development. It purchases Québec goods and services and promotes sustainable development and has invested in a diverse set of interrelated office buildings, convention centers, and public transportation systems in Montreal.
Polity
Polity
In 2014, Aviva Investors published A Roadmap to Sustainable Public Markets, in which it called for collaborative action in developing suggestions on “how public policy makers could move the capital markets onto a more sustainable basis” and recommending a series of capital market reforms.
Standards setting
Standards Setting
Norges Bank Investment Management incorporates “internationally recognized standards” into its investment process, which have led it to divest from companies in the tobacco and weapons industries, as well as those causing severe environmental damage. Norges participated with the Organization for Economic Co-operation and Development standard-setting initiative relating to the extractives industry and the stability of the financial markets and has responded to various proposals for financial market regulation internationally.

Can investors use system-level investing strategies to respond to the UN’s call for private sector help in achieving the SDGs?

The UN Sustainable Development Goals (SDGs) are excellent examples of issues within the environmental, social, and financial systems that can affect investors, business operations, and the functioning of financial markets.

The issues highlighted by the SDGs have the hallmarks of those that typically interest system-level investors. Most notably, they focus on creating widespread, sustainable change that fortifies the planet’s overarching environmental, social, and institutional systems for people, governments, and business alike and for generations to come. They are issues upon which researchers, governments, and the public and private sectors agree are important to the successful functioning of systems; are those that pose relevant threats to—or opportunities for—investor portfolios, and; are those that investors can influence.

TIIP recommends a three-step process of investor action on the SDGs:

  • Step 1

    STEP 1: Segment the SDGs into relevant systems

    From Goals to Action - Two Systems

  • Step 2

    STEP 2: Determine which SDGs to focus on

    The SDGs are numerous, complex, and challenging to tackle. How can an investor decide which goals or issues are related to their investments and therefore worth time and attention?

    In our report, Systems-Level Considerations and the Long-Term Investor: Definitions, Examples, and Actions, we propose four guidelines (consensus, relevance, effectiveness, uncertainty) to help investors identify issues of focus.

  • Step 3

    STEP 3: Use TIIP’s resources to act

    The Ten Tools of Intentionality. TIIP has identified ten of the most prevalent system-level investing strategies used by some of the world’s top investors, dubbed the “ten tools of intentionality.” Using these strategies, investors contribute to maintaining or improving the health of the planet’s systems and, ultimately, their portfolio returns. Investors can use the ten tools to gain an understanding of approaches in practice and to inform their own strategies. Read more about the tools here.

    Key Investment Activities. The ten tools are useful, but how do those tools manifest themselves across five traditional investment activities such as investment belief statements, security selection and portfolio construction, targeted investment programs, corporate engagement, and manager selection? Learn here about how your peers use these activities to contribute to progress on environmental, social, and financial system issues.

    Customized Research and Consulting Solutions. While our publicly-available resources are designed with a high degree of utility, we realize that each organization’s needs are unique. We’d welcome the opportunity to work with you to support your system-level investing efforts.

Can investors use system-level investing strategies to respond to the UN’s call for private sector help in achieving the SDGs?

The UN Sustainable Development Goals (SDGs) are excellent examples of issues within the environmental, social, and financial systems that can affect investors, business operations, and the functioning of financial markets.

The issues highlighted by the SDGs have the hallmarks of those that typically interest system-level investors. Most notably, they focus on creating widespread, sustainable change that fortifies the planet’s overarching environmental, social, and institutional systems for people, governments, and business alike and for generations to come. They are issues upon which researchers, governments, and the public and private sectors agree are important to the successful functioning of systems; are those that pose relevant threats to—or opportunities for—investor portfolios, and; are those that investors can influence.

TIIP recommends a three-step process of investor action on the SDGs:

  • Step 1

    STEP 1: Segment the SDGs into relevant systems

    From Goals to Action - Two Systems

  • Step 2

    STEP 2: Determine which SDGs to focus on

    The SDGs are numerous, complex, and challenging to tackle. How can an investor decide which goals or issues are related to their investments and therefore worth time and attention?

    In our report, Systems-Level Considerations and the Long-Term Investor: Definitions, Examples, and Actions, we propose four guidelines (consensus, relevance, effectiveness, uncertainty) to help investors identify issues of focus.

  • Step 3

    STEP 3: Use TIIP’s resources to act

    The Ten Tools of Intentionality. TIIP has identified ten of the most prevalent system-level investing strategies used by some of the world’s top investors, dubbed the “ten tools of intentionality.” Using these strategies, investors contribute to maintaining or improving the health of the planet’s systems and, ultimately, their portfolio returns. Investors can use the ten tools to gain an understanding of approaches in practice and to inform their own strategies. Read more about the tools here.

    Key Investment Activities. The ten tools are useful, but how do those tools manifest themselves across five traditional investment activities such as investment belief statements, security selection and portfolio construction, targeted investment programs, corporate engagement, and manager selection? Learn here about how your peers use these activities to contribute to progress on environmental, social, and financial system issues.

    Customized Research and Consulting Solutions. While our publicly-available resources are designed with a high degree of utility, we realize that each organization’s needs are unique. We’d welcome the opportunity to work with you to support your system-level investing efforts.

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