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New investment culture embraces ESG

Gone are the days of managing risks and rewards at a portfolio level; investors are adopting a so-called ‘systems level thinking’, investing in line with a broader understanding of their ability to impact the world around them and to influence the shape of the future that will, in turn, impact their portfolios.

So argues a new report, Tipping Points 2016: Summary of 50 Asset Owners’ and Managers’ Approach to Investing in Global Systems from The Investment Integration Project (TIIP), and supported by the New York-based Investor Responsibility Research Centre Institute (IRRCi).

Gathering data from a diverse set of 50 asset owners and managers, with combined assets under management of $17.3 trillion, the authors find more investors are intentionally pursuing strategies that tie portfolio-level decision-making to systems level risks and opportunities.

It’s an important part of the advancement that finance appears to be taking as it contends with an evolving world, explains IRRCi executive director Jon Lukomnik.

“It has been more than a half century since Harry Markowitz popularised diversification and portfolio level investing, for which he later won a Nobel Prize,” Lukomnik says.

“Since then, capital markets around the world have changed dramatically, and the global financial crisis was a game changing wake-up call. Against this dynamic backdrop, investors are evolving and realising that global financial, environmental and social systems have major ramifications on their investments and simultaneously, their investments have deep impacts on those systems.

“The report illustrates the new policies and practices that investors are embedding into their business culture and investment strategies. We now have concrete evidence that investors are intentionally confronting global environmental, social and financial systems challenges in a way that makes financial sense,” he says.

Key catalysts behind the changing investment culture include industry-led initiatives like the UN-backed Principles of Responsible Investment, a network of more than 1500 investors working to create a sustainable financial system.

The Task Force on Climate Related Financial Disclosures, which aims for companies to voluntarily produce climate-related financial risk disclosure for the investor community, is another force of change.

The report finds investors are motivated to invest at a systems level by risk reduction and financial returns; a desire to contribute positively to society as well as public pressure and legislation.

It highlights the steps investors are taking towards systems-level investing in what it calls “on ramps”. ESG integration, prioritising long-term value creation, impact investment, exclusion or screening, the careful selection of managers and investment stewardship are typical “on ramps” that lead to a systems-level investment approach.


The report also identifies deliberate strategies among its sampled investors to pursue big-picture strategies, counting 10 “pathways” via which investors express what it calls “intentionality”. It is through these pathways that investors bridge the gap between their daily portfolio management decision-making, to facilitate impact at a systems level.

The pathways include:

Additionality: Where investors pursue opportunities with competitive returns in markets that are currently underserved.

Diversity of Approach: Where investors consider a diverse set of system-level risks. Climate change, for example, is an area where an investor might adopt a diversity of approaches via divestment, engagement or investing in alternative energy.

Evaluation: Where investors place a financial value on environmental and societal systems. America’s biggest pension fund, California Public Employees’ Retirement System adopted the investment belief – one of 10 – that long-term value creation requires effective management of financial, physical and human capital; another belief at the fund articulates that risk is “multifaceted” including issues not measured by tracking error and volatility, like climate change, demographics and resource scarcity.

Geographic Locality: Where investors buy connected assets in the same geography. This could include endowments committed to serving communities, or investing to support local economic growth as demonstrated by Ireland’s €7.6 billion ($8.3 billion) Strategic Investment Fund. Similarly Canada’s $254.9 billion Caisse de dépôt et placement du Québec includes investment in Quebec businesses, infrastructure and public transportation in its global portfolio.

Solutions: Where investors create investment vehicles that target solutions. This is a strategy pursued by the Dutch pension fund manager PGGM when it allocated a multi-billion dollar portion of its assets to what it describes as a “solutions” or “impact” portfolio. Here the focus is on four issues where it believes it has particular expertise and can effectively address fundamental environmental and social systemic challenges – climate change, food, healthcare and water.

Successes and challenges

The report finds that investors are successfully integrating ESG into their investment strategies, along with developing investment products that target environmental and societal issues.

Similarly, respondents reported success in meeting specific goals, like reducing exposure to risk or allocating assets to a solutions-orientated portfolio.

However, challenges include the varying quality and availability of data, particularly from investee companies. The need to educate staff, clients and other stakeholders on systems-related considerations, and how to measure the true impact from ESG or other systems-level investments was also cited as a challenge.

Here the report authors highlight the need for more support for asset owners and managers in measuring and reporting on the effectiveness of their individual and collective policies at a systems level. Owners and managers would also benefit from identifying opportunities for collective action, it says.

“A lot of work is left to be done to better understand the complex relationship between systems and portfolios. But, this study demonstrates that institutional investors, whether implicitly or explicitly, understand that the world is becoming increasingly interconnected,” TIPP’s William Burckart, report co-author says.

“Previously, investors could find ways to insulate their portfolios from certain global events. Today, even seemingly “local” events can immediately and adversely affect all portfolios. Because the largest and most influential investors are recognising this trend and beginning to consider the connection between planetary systems under stress and adversely effected portfolio performance, we are looking at a potentially critical shift in the evolution of investment.”

Intentional steps towards positive impact at a systems level may still be hesitant, taken by relatively few investors, unclear, or lack consistent articulation.

But they are an important part of the evolution as finance contends with the realities of volatile financial markets, social needs and environmental instability.

The concept among asset owners that they are universal investors with responsibility for the vitality of the whole economy has taken root. And with it the knowledge that what happens at a systems level will impact the value of their portfolios.

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