#20: From Backlash to Breakthrough: The Unstoppable Rise of Systemic Approaches in Responsible Investing
Feeling discouraged from the current talk about sustainability backlash? Think again!
With environmental and social challenges on the rise, it's clear that any perceived backlash against sustainability is not here to stay. Why? Because these issues transcend politics as well as vested interests and cannot be ignored or voted out. Regardless of who's in power or what ideology prevails.
Admittedly, in the current political climate we will likely see further attempts to delay necessary actions. But the inevitable catastrophic consequences of climate change and other global challenges will eventually demand everyone's attention.
We recommend looking beyond what mainstream news and social media platforms have to say. There’s a very different reality emerging for those willing to seek it out. For instance, we’re engaging in profound conversations with top financial firms. Many visionary business leaders recognize that there is no turning back and that voluntary measures aren't cutting it anymore. However, transitioning to more effective strategies can still be daunting and raises complex questions.
Encouragingly, even well respected sources are increasingly raising bold ideas. Recent examples include:
Harvard Business Review: In Defense of Degrowth – Advocates for reassessing our fixation on continuous economic growth, promoting sustainability and social equity instead.
New York Times: Shrink the Economy, Save the World – Challenges the notion that economic growth always benefits society, highlighting that it often disproportionately favors the wealthy.
Ernst & Young: A New Economy – Points to systemic flaws in our global economy as the root cause of our current polycrisis and calls for a just and regenerative transformation. It stresses the inevitable shift of the sustainability movement to system change.
We’re particularly excited about the E&Y report as it identifies systemic flaws and emphasizes the crucial role of business in driving the necessary economic transformation. However, while it is increasingly recognized that current economic and political systems, which favor extractive and degenerative business practices, are the root cause of many Sustainable Development Goal (SDG) challenges, practical solutions for addressing these flaws at scale are still scarce.
Therefore, and yes, we've said it before and we'll say it again: this is where System Change Investing (SCI) comes in.
SCI picks up where most discussions today end and takes the critical next step towards an actionable solution (of which we will need many). It is based on the following observations:
Companies tend to mitigate negative impacts only up to a certain point - usually stopping when it becomes unprofitable, particularly if their competitors are not taking similar actions.
This perpetuates harmful business behavior and business models unless the context in which these companies operate changes. Changing the context means collaboratively evolving systems in ways that internalize externalities and create conditions in which regenerative business models are the winning strategy.
(Long-term) Investors must focus on achieving such conditions because:
Continued environmental degradation at the current scale will eventually lead to system breakdowns and consequently significant losses in investment portfolios of all sorts.
Understanding the potential impact on portfolios under different climate scenarios (e.g., 2°C or 3°C warming) is important but insufficient to truly mitigate risk. Only by promoting the evolution of systems and creation of conditions that favor regeneration over degeneration will portfolios be protected. And while we often hear that this is all so negative, and can’t we make more positive, we struggle to see why creating systems and conditions for a thriving planet should not be the best and most fun things we all have ever been part of.
But back to “stick arguments”: … the definition of fiduciary duties will eventually shift accordingly. In fact, it has already started (Pension Fund Trustees and Fiduciary Duties – Decision-making in the context of Sustainability and the subject of Climate Change).
What is there to do?
Incentivizing companies to not only mitigate negative impacts when profitable but to actively create conditions to make regenerative business models the winning strategy. This means empowering those on the ground who best understand the current barriers to full impact mitigation and changes needed to overcome them.
Leveraging the crucial role of financial markets by signaling that companies committed to systemic change are favored by investors, driving meaningful progress.
The Strategic Edge of SCI
Beyond SCI being potentially the most promising and powerful evolution of responsible investing, it offers several additional and important benefits:
Enhances Investment Returns: Companies adept at managing system change challenges exhibit higher management quality and tend to perform better, especially under adverse conditions.
Easy to Implement: SCI is an enhancement of existing metrics and strategies, making it straightforward to integrate.
Broad Applicability: SCI can be applied across capital markets as all companies can be rated on system change performance.
Comprehensive Risk Mitigation: Most importantly, SCI offers a truly comprehensive risk mitigation strategy for investors by addressing structural systemic risks.
The SCI team provides detailed models and strategies to help financial firms integrate system change into their investment approaches effectively and profitably.
Let’s connect and explore how we can collaborate to protect your portfolios and create a more resilient future.