Guest Articles

May 12

William Burckart / Steve Lydenberg

21st Century Investing: Why Today’s Global Challenges Call for a System-Level Approach to Impact

The world has always been a dangerous place, but the context, scope and scale of today’s risks have changed. Melting polar ice caps, species driven to extinction, embedded social inequities, destabilized democracies and the COVID-19 pandemic —these risks are less local, more global and more urgent than many previous challenges we’ve faced. Indeed, in many cases, they’re existential threats.

If there’s a silver lining, it’s this: It seems to take global crises to prompt a change of course, to rouse us to act. Since these challenges threaten to destabilize the very fundamentals of social and environmental systems, they are serving as wake-up calls to leaders and organizations across the public, private and development sectors, forcing them to respond. And investors – who can help mobilize the levels of capital needed for a truly global response to these complex challenges – increasingly recognize the gravity of the situation and the need for their involvement.


System-level investing: A way forward

The good news is that investors can prepare for and manage these systemic challenges. A growing class of investors—we call them “system-level investors”—acknowledge that they have an impact, whether negative or positive, on global social, financial and environmental systems. And they also recognize that those systemic challenges impact their portfolios in return.

As we show in our new book, “21st Century Investing: Redirecting Financial Strategies to Drive Systems Change,” institutions and individuals can go beyond conventional and sustainable investing to address complex problems such as income inequality and climate change on a deep, systemic level.

These investors intentionally manage risks and rewards at a system level to provide a stable, resilient foundation for investments across all asset classes. They set explicit goals for their impact on systems, use a range of techniques to reach those goals, and measure their progress toward them. They seek to preserve and enhance foundational social, financial and environmental systems in the long term while achieving competitive returns.


Applying a System-level Lens to Improve Healthcare

Take, for example, investors contending with the systemic risks and challenges of our current healthcare system – and not just seeking to profit from it. They might be endowments of hospitals or healthcare-related foundations, or asset managers for life insurance companies with a vested interest in the maintenance of an effective and smoothly functioning system. Or they could simply be individuals concerned about the inability of today’s healthcare system to ensure affordable care for all. Below, we’ll explore how these system-level investors’ approach would differ from that of conventional and sustainable investors.

Conventional healthcare investors do not pay much attention to social or environmental challenges. They study changing demographics, trends in epidemiology, technological innovations and the pipeline of new drugs pharmaceutical companies are bringing to the market—all with an eye to picking stocks. Whether people can afford to stay healthy, or whether the population is getting sicker or healthier is not of primary concern. Others can worry about such questions while they tend to their returns.

In contrast, sustainable investors search out technology companies that reduce healthcare costs, pharmaceuticals seeking cures for neglected diseases in developing countries, and generic drug companies serving the developing world with low-cost business models. They avoid companies with histories of product quality controversies or fraud, and ask for more data on the pricing policies of those marketing patent-protected drugs. They may encourage their investees to work toward greater social impact, for instance, by urging companies to improve their rankings on the Access to Medicines Index, which ranks 20 of the world’s largest pharmaceutical companies based on their efforts to address access to medicine. But despite their focus on the impact of their investments, the larger problem of whether overall health outcomes are improving is not directly on their radar.

System-level investors translate their interest into action differently. They integrate guiding principles into their practice, such as those of a globally respected healthcare standard setter—say, the World Health Organization. They create portfolios with holdings that embody a healthcare system with such widely accepted characteristics as affordability, efficiency, reliability, trustworthiness and accessibility. They invest in healthy living practices like preventative medicine, healthy diets and exercise. Their fixed-income portfolios include the debt of non-profit hospitals and community healthcare groups. Their venture capital investments include drug companies specializing in vaccines.

System-level investors also engage with key stakeholders in the system—the corporations that are incurring healthcare insurance costs that put them at a competitive disadvantage, for example, or the hospitals that are struggling to contain drug costs—to identify best practices that will lead to better outcomes for all. They encourage communications and trust among these stakeholders, and work to establish best practices and advocate for regulatory change that will set a level playing field. They understand the political nature of the healthcare insurance debate, and engage with the healthcare industry and legislators to work toward consensus.


Setting a course for investor action

“21st Century Investing” shows how both conventional and sustainable investors can now integrate and extend their current practice to include a system-oriented focus. All investors—from individuals and families, to local institutions and the largest pension funds and financial services firms—can pursue this path. To be sure, many are heeding the call.

For instance, self-identified “universal owners” – i.e., large institutions with long-term investments in widely diversified holdings – have a growing interest in system-level investing. These institutions, such as Japan’s $1.6 trillion Government Pension Investment Fund (the world’s largest pension fund), invest in a cross-section of securities in virtually all asset classes. Because they own stakes in so many industries, they recognize that their success is bound up with the health and prosperity of the global economy and have begun to act on that knowledge.

Similarly, investors with long-term time horizons like Norges Bank Investment Management know that the further into the future they look, the more their interests and those of society coincide. The greater an investor’s commitment to a long-term approach, the more they value the health of the underlying systems that will provide a foundation for ongoing growth in their investments, both years and even decades from now.

Some investors may also have non-financial motivations that drive them toward system-level investing. For example, the Church of England Pensions Board believes that a range of “stewardship responsibilities,” including environmental, social and governance matters, is essential to its long-term duties and obligations. The practice of stewardship acknowledges investors’ obligations to consider the broad societal implications of their investments, thereby transcending the conventional “financial only” view implicit in conventional market-based investing, and motivating them to address systemic needs.

Naturally, this approach is also appealing for self-identified impact investors who intentionally seek to generate social and environmental benefit through their investments, along with financial returns. For instance, in addition to committing 99.5% of its portfolio to impact investments, the KL Felicitas Foundation has extended its mission to enabling the global financial system to achieve greater social and environmental impact. Their approach shows how investors can develop their own system-oriented focus, aiming to foster change in a particular industry.

These are among the investors making the transition to a system-level approach in its varied forms today. Though the challenges are daunting, these investors believe the power to make this change is real. It will take time—large systems are complex, and no single investor can move them singlehandedly. But together we can create a mosaic of change that will produce stable, effectively functioning systems – and an investing ecosystem that fortifies the social and environmental systems that feel so vulnerable now.


NOTE: The Investment Integration Project is offering NextBillion readers a 20% discount on the book “21st Century Investing.”  Click here to purchase it, and be sure to enter NextBillion20 at check out.


William Burckart leads TIIP (The Investment Integration Project) and is a fellow of the High Meadows Institute. Steve Lydenberg is the founder of TIIP and a partner at Domini Impact Investments.

Photo cropped from original. Credit: Jernej Furman




corporations, ESG, impact investing