This Occasional Paper from The Investment Integration Project (TIIP) addresses the question of how asset owners and managers can identify environmental, societal and financial systems-level issues relevant to their investment processes. Integration of these systems-level considerations can help investors manage long-term risks and rewards while seeking competitive portfolio-level returns.
The primary questions addressed in this paper are:
- What are the characteristics of environmental, societal and financial systems-level issues that make them relevant to long-term investors for integration into investment processes?
- What are examples of these systems-level issues that rise to the level of significance for such consideration and how in practice can that level of significance be determined?
Four guidelines that can help long-term investors determine the relevance of systems under consideration are proposed:
- Breadth of consensus as to the importance of the system under consideration
- Potential of the feedback loops from the system to impact the investor’s portfolios positively or negatively
- Potential for the investor’s policies and practices to impact the system positively or negatively
- Degree of uncertainty about the potential outcomes that would ensue from fundamental disruptions at the systems level
The paper examines six examples of systems-level issues that share these characteristics.
Within broad environmental systems, the paper looks at the issues of:
- Climate change
- Access to fresh water
Within broad societal systems, it looks at the issues of:
- Well-being: poverty alleviation and access to healthcare
- Dignity: human and labor rights
Within broad financial systems, it looks at the issues of:
- Stability and credibility
- Transparency of sustainability data
Resolution of the question of which issues do and do not appropriately rise to the level of systems-level consideration is crucial for institutional investors because issues with too narrow a focus may prove irrelevant, ineffective or even potentially detrimental to their management of long-term risks and rewards.