#31: SCI: the Next Generation of ESG/Responsible Investing

System Change Investing (SCI) provides an exciting new strategy for improving responsible investing and corporate sustainability. These fields have become mainstream. But climate change and many other environmental and social problems are growing rapidly. SCI is a new form of responsible investing that has the potential to reverse and resolve these challenges. This post summarizes why SCI is important, the many benefits it provides, and how it works.

Importance

Rapidly growing environmental, social, economic and political problems severely threaten businesses, investors and society. Current responsible investing approaches provide many benefits, but they have not come close to resolving major challenges. That mainly is because these approaches largely seek to change companies and address symptoms, such as climate change.

However, companies mostly do what economic and political systems demand. These systems effectively (though certainly unintentionally) say to companies, cause climate change and other SDG problems or cease to exist. These flawed systems are the root causes of major challenges. Changing them (i.e. system change) is essential for protecting business and society.

We are in a time of accelerating problems and opportunities. Only the corporate and financial sectors have the power and resources needed to drive collaborative system change at the pace and scale required to reverse environmental and social decline. They largely are controlled by investing. SCI uses this powerful lever to engage these sectors in system change.

Current investment approaches for driving system change mainly focus on investing in green companies, promoting sector-level change, or shifting portfolios from brown to green companies. These approaches provide many benefits. But they do not directly address root causes (i.e. flawed economic and political systems). SCI does. As a result, it is likely to become a dominant form of responsible investing.

Benefits

Extensive SCI benefits provide high market share potential. The approach is easy to implement, but potentially the most powerful form of system change-focused investing. It provides the first full risk mitigation investment strategy. And it enhances investment returns, impact, reputation and assets under management.

SCI involves a simple modification to ESG strategies that nearly all large asset managers already are using. It is broadly applicable in the capital markets because all companies can be rated on system change performance. SCI ratings can be used as an overlay on nearly all fund types to enhance financial and sustainability performance.

Current investment approaches addressing systemic risk often focus on climate change and other symptomatic risks. Effectively mitigating systemic risk requires addressing root causes. By doing this, SCI enables full risk mitigation.

SCI enhances returns by assessing systemic risks and opportunities as well as providing strong indicators of management quality. By addressing system change and root causes, SCI provides the highest possible sustainability benefits and impacts. It is the first responsible investing strategy with the potential to achieve the SDGs. As a result, asset managers offering SCI funds will attract new investment and position themselves as global responsible investing leaders.

Methodology

SCI is the next generation of ESG/responsible investing. It expands the focus to include system change and root causes. Companies are rated on system change performance, and then investments are shifted to system change leaders. This strongly incentivizes companies to address system change.

SCI provide several models for rating system change performance, ranging from introductory to full whole system approaches. Introductory approaches add system change metrics to existing ESG models. Whole system approaches require a frame of reference. The most advanced SCI models use the Global System Change (GSC) framework.

Ultimately, corporate system change performance cannot be accurately rated until system change overall is understood. The GSC framework defines sustainable society using the laws of nature and identifies the systemic changes and actions required to get there. Clarifying this whole system roadmap makes it possible to identify the optimal corporate role in system change. Aspects of this become metrics in SCI models.

The whole system SCI model is segregated into three metric categories – traditional ESG, mid-level system change (i.e. sector, stakeholder, environmental/social issue-level), and high-level system change (i.e. overarching economic, political, social system-level). Sample SCI metrics include system change goals and strategies, senior management commitment, accountability, system change collaboration, and supporting system change efforts.

As with ESG, communicating the benefits of SCI is just as important as effective SCI implementation and operation. The SCI team helps financial clients to most effectively integrate system change into responsible investing strategies and communicate these approaches in a highly appealing manner.

For more information, visit our website SystemChangeInvesting.com or contact us at info@SystemChangeInvesting.com