21st Century Investing: Reorienting Financial Strategies to Drive Systems Change. 2021. William Burckart and Steve Lydenberg, CFA. Berrett-Koehler Publishers, Inc..
Responsible investing, sustainable investing, impact investing, social investing, ethical investing, ESG (environmental, social and governance) investing – labels abound for the space in which investors add non-financial considerations to traditional risk management and performance. We can now add another term, “system-level investment”, the key theme of 21st Century Investing: Reorienting Financial Strategies to Drive Systems Change. The authors, William Burckart and Steve Lydenberg, CFA, are co-founders of TIIP, the investment integration project.
The book characterizes investors as conventional, sustainable, or system-level. “Systems” are categorized as social, financial or environmental and include areas as diverse as consumer safety (social), fair and honest markets (financial) and climate stability (environmental). Conventional investors are described as aiming “to maximize returns in as short a time as possible”. Sustainable investors “seek ESG benefits in addition to their financial returns,” but system-level investors go further by setting “explicit goals for their impact on systems.”
Burckart and Lydenberg argue persuasively that systemic issues have important implications for future returns. For example, they point to a report by the Cambridge Center for Risk Studies which suggests that social unrest associated with unemployment among “millennials” could reduce the value of US equity portfolios by up to 23%. Issues such as water quality and climate change can also affect investment results or pose systemic risk. Investors should beware.
The book outlines a roadmap to becoming a system-level investor with six specific steps:
- Take advantage of advanced techniques.
These steps are described in detail and examples of how top investors are currently implementing them are presented. Essentially, system-level investing is an evolution of responsible or sustainable investing that considers not only how ESG factors affect an investor’s portfolio, but also how investors can affect the whole world, for the better or for the worst.
21st century investment can be more useful when it comes to illustrating theory with practical examples. It features interesting case studies on how investors focus on creating long-term value (Norges Bank Investment Management), integrating ESG (Allianz) and how to influence public policy ( CalPERS and Aviva Investors). Obviously, what is feasible depends on the size. A “universal owner,” such as the Japanese government’s retirement investment fund, can exert influence over external managers and other investors in ways that retail investors cannot.
One quirk in the book is the paucity of references to governance, the G in ESG. Standard ESG approaches can put governance on a par with environmental and social factors. The International Corporate Governance Network links governance to long-term value creation, sustainable economies, social prosperity and a healthy environment, interests shared by the authors of this book. The lack of governance of 21st century investment raises questions about how investors can be assured of meeting social and environmental commitments if the strength of governance is unknown.
Another problem is the lack of reliable data on the size of the sustainable investing universe. The reader will not learn from this book how well developed the worlds of sustainable and system-level investing are compared to that of conventional investing. No mention is made of the more than $100 trillion managed by UN PRI (Principles for Responsible Investment) signatories or how sustainable investing has grown to $35.3 trillion in assets under management in five major markets in 2020, as reported by the Global Sustainable Investing Alliance (GSIA). Such figures would demonstrate that sustainable and system-level investments are already a significant part of the global investment universe.
Although the book refers to a landmark move, much of what is discussed will already be familiar to many investors.
- System-level investing seems closely related to impact investing, which the GSIA defines as “investing to achieve positive social and environmental impacts”.
- Parts of the six-step roadmap echo other frameworks, such as the PRI’s “Investing with SDG Results” (Step 1: Identify Results, Step 2: Define Policies and Goals, etc. ).
- Most of the techniques described can be found in a standard ESG toolkit. The authors have affixed the “Diversity of Approach” label to the actions undertaken by New Zealand Superannuation, but the combination of ESG integration, manager monitoring, research, engagement, collaboration with the industry, etc., reads like a standard collection of sustainable investing tools.
In addition, little attention is paid to the difficulties faced by many sustainable investors, including data inconsistency and the problem ofgreenwashing.”
This book deals with important issues. One of its strengths is that it clearly articulates why non-financial considerations should be included in investment analysis. In addition, it presents a range of tools that can facilitate the integration of these considerations into the investment decision-making process and help the investment community play an important role in improving social and environmental issues. These tools may be familiar to experienced sustainable investors, but the book nonetheless admirably describes an evolution of investing that is likely to have a profound impact on the world in the 21st century.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect the views of the CFA Institute or the author’s employer.
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