#41: How Do We Sell System Change in a Tougher Sustainability Environment
Current responsible investing and corporate sustainability approaches were not resolving environmental and social problems under supportive administrations. The new US administration is likely to roll back environmental/social protections and increase ESG/sustainability pushback. Existing approaches will be even less effective in this environment.
These approaches failed to resolve major challenges mainly because they sought to change companies instead of the systems that control them (i.e. failed to address root causes). Improving these systems (i.e. system change) is the most important sustainability issue. It is essential for protecting business and society. This post discusses how to effectively promote system change in less supportive sustainability environments.
The Business Case for System Change
By far, the most important strategy for effectively engaging the financial and corporate sectors in system change is to make it profitable. This was the main strategy used to make ESG/sustainability mainstream. Successfully selling system change requires clearly making the business case. This involves showing how system change can enhance short-term and long-term investment returns and corporate profits.
The system change business case is like the responsible investing and corporate sustainability business cases. Two main components are: management quality and risks/opportunities.
Extensive research shows that sustainability leaders outperform on average. The main reason for this is the proxy value for management quality. Most analysts would say that management quality is the main determinant of investment returns because it affects nearly all aspects of companies. Sustainability is a complex challenge. Companies that do well in this area implicitly have the sophistication to succeed in other areas, and thereby earn superior returns.
System Change Investing (SCI) involves rating companies on system change performance and shifting investments to system change leaders. System change is a more complex challenge than current corporate sustainability approaches, and therefore is an even better indicator of management quality and investment returns.
ESG funds often outperform because they assess financially relevant ESG risks and opportunities that are ignored by traditional financial analysis. SCI funds assess systemic risks and opportunities that typically are not addressed by conventional financial and ESG analysis. This further enhances returns.
Feedback loops are another key part of the system change business case. As the human economy expands in the finite Earth system, negative corporate impacts return more quickly to harm companies, often in the form of lawsuits, boycotts and reputation damage. Very generally speaking, flawed systems make it impossible for companies to mitigate about 80 percent of negative impacts. System change is essential for mitigating these impacts and protecting companies from the growing repercussions of them.
From the corporate perspective, another important aspect of the system change business case is maintaining sustainability leadership. This provides many benefits, often including enhanced reputation, improved stakeholder relations, increased market share, enhanced ability to attract and retain a high-quality workforce, and increased profitability. As the most important sustainability issue, maintaining leading corporate sustainability performance increasingly will require a strong system change strategy. System change is the new sustainability. System change leaders will attain many of the financial and competitive benefits of current sustainability leaders.
Over the longer-term, unintentionally destructive economic and political systems inevitably will change through voluntary or involuntary means. Involuntary change (i.e. collapse) will wipe out extensive investments and companies. Voluntary system change enables companies and investors to prosper over the long-term.
Make It Simple
System change is the most complex challenge facing business and society. Evolving economic and political systems into sustainable forms can seem extremely difficult. This complexity is a main barrier to system change. Simplifying system change greatly facilitates engagement.
Two main simplification strategies are: just begin and the rule of law. A main goal of SCI is to get companies into the system change room or seated at the system change table (i.e. begin the process of supporting system change).
No one knows all the system change answers. But there are many experts, good ideas and proven examples. Initially, companies can support system change by collaborating with other segments of society, utilizing experts, and helping to expand proven concepts. The key issue is to just begin.
The rule of law is one of the most important system change framing devices. This principle says that companies should be free to do what they want, provided they do not hurt anyone. There are many system flaws that compel companies to cause harm (e.g. externalities, time value of money, limited liability). They all have the common characteristic of not holding companies fully responsible for harming the environment and society. This is the general mechanism that makes it impossible to stop harm in competitive markets.
The rule of law boils system change down to one simple concept. The meta system flaw is the failure to hold companies fully responsible for harm. Therefore, the meta solution is to hold them fully responsible. This overarching concept makes system change easy to understand at a high level.
Holding companies fully responsible makes sustainable (i.e. non-harmful) behavior the profit-maximizing strategy. Achieving this is a complex challenge. Companies traditionally opposed these types of systemic changes. But as environmental and social problems continue to grow rapidly and companies realize system change is inevitable, they often will see that they are far better off helping to drive it. The rule of laws provides a framework for guiding system change at all levels.
Reality Always Wins
Vested interests and deceptive media have misled many citizens into believing that climate change and other environmental and social problems are not real. They elect politicians who promise to remove so-called unnecessary environmental and social protections. But human perceptions are irrelevant to reality and nature.
Human-induced global warming is a proven scientific fact. Climate change will not stop because citizens have been misled into thinking it's not real. Climate change will continue to have growing financial impacts on business and society. Proactively addressing it, even if government does not require this, is essential for protecting investors and companies.
ESG pushback involves another denial of reality. ESG can be boiled down to one simple question: are ESG issues financially relevant? If they are, they must be addressed. Failing to do so increases investment risk and lowers returns. Many ESG issues are highly financially relevant (e.g. making safe products, taking care of employees, minimizing energy and materials costs, being seen as a responsible company).
ESG put pressure on companies to reduce environmental and social harm. This can restrict profits. Companies cannot effectively argue that they should be allowed to profit by harming the environment and society. Instead, vested interests often misled citizens into blindly opposing ESG. This frequently will lower investment returns. Opposition to ESG denies reality. Therefore, it ultimately will fail.
As noted, system change is the most important (and therefore most financially relevant) sustainability issue. Current systems degrade the foundation upon which the economy is built (i.e. the environment and society). These systems have built-in seeds of destruction, not by intention or design, but through myopia. They were developed from a reductionistic perspective that ignores relevant factors, and thereby produces unintended consequences, such as widespread environmental and social degradation. Ignoring these systemic root causes when investing is ignoring reality.
Flawed, inaccurate perceptions of reality always ultimately are corrected. Reality always wins. Many environmental and social problems are growing rapidly around the world. Removing protections will accelerate problems by compelling companies to cause even more harm.
In the closed Earth system, this systemically-induced corporate harm will have rapidly growing negative impacts on investors and companies. System change is the only strategy that can end this harm and protect business and society.
Companies are like puppets. They do what puppet masters (i.e. flawed systems) demand. The new US administration is likely to hold companies less responsible for harm, and thereby compel more of it. In the absence of government action, only the corporate and financial sectors have the power and resources needed to drive system change in the short time frame we likely have. While the puppet masters control the puppets, paradoxically probably only the puppets can change the puppet masters.
SCI uses the capital markets to reward companies for driving system change. It makes system change practical and profitable for the corporate and financial sectors.
For more information about SCI, visit our website SystemChangeInvesting.com or contact us at info@SystemChangeInvesting.com
