NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Climate change is a defining issue of our time, affecting nearly all aspects of life globally. So much so the United Nations highlighted the issue as one of its Sustainable Development Goals (SDGs) in January 2016, a key part of the 2030 Agenda for Sustainable Development. “Climate change is now affecting every country on every continent,” the UN emphasized in launching the SDGs. “It is disrupting national economies and affecting lives, costing people, communities and countries dearly today and even more tomorrow.”

Over the past two years, the global financial community has responded by launching a series of investing frameworks, national-level activities, stock exchanges and indexes to encourage and support private capital investment in climate change and other sustainable goals. What’s more, several investors that include APG and PGGM, two of the largest fund managers in the Netherlands with a combined $705 billion in assets under management, have worked with others to recommend ways to accelerate private sector investment in line with the SDGs. They’ve also encouraged government action to create an enabling environment for such investments and provided investors with guidance for measuring the alignment of their assets with the SDGs.

Despite this increasing private sector interest in investing in these issues and investor “alignment” with the SDGs, growing evidence suggests we are still off track to hit related targets like The Paris Agreement. Paris, of course, was a global action plan adopted in 2015 that all countries agreed to work to limit global temperature rise to well below 2 degrees Celsius and whose implementation is essential for the achievement of the SDGs. Failing to meet those targets elevates the likelihood that wildfires, sea level rises, crop failures and other destabilizing climate-related risks will only continue to intensify. It’s also worth noting that global emissions increased for the first time in three years.

Part of the problem is that few investors have attempted to measure whether they are meaningfully contributing to progress toward achieving the goals. That is to say, although some investors report how their investments relate to specific SDGs, they are not necessarily attempting to influence overall progress toward achievement of the goals or measuring the effectiveness of such attempts.

In a new report by the IRRC Institute and The Investment Integration Project (TIIP) titled Measuring Effectiveness: Roadmap to Assessing System-level and SDG Investing, TIIP identifies a process for how investors can determine their influence on four foundational characteristics of environmental, societal and financial systems. These characteristics—adaptability, clarity, connectivity and directionality—serve as the core indicators of systems’ health and resilience (or lack thereof).

Investors acting to exercise influence on these characteristics – like New Zealand Superannuation, a sovereign wealth fund with $21.5 billion in assets that adopts a diversity of approaches (e.g., investments, research and corporate engagement) to address the complex challenges of climate change—seek to change the fundamentals of a system. Operating under new investment paradigms not only produces a positive outcome for the particular challenge in question but can also contend with similar challenges in the future.

So, in the case of climate change, the current challenge stems not simply from the fact that fossil fuels emit greenhouse gases. Rather, there is a more complex dilemma in that our global economic system is so dependent on fossil fuels as its predominant source of energy that it cannot adjust rapidly enough to prevent climate change from occurring.

By changing the paradigm for energy production not only to renewables, for example, but to a diverse set of fuel sources, investors can create a system capable of adapting to unanticipated challenges. In this way, investors can influence the larger system so that it will not simply replace dependency on fossil fuels with dependency on another predominant source of energy. For instance, solar, wind, ocean, geothermal and other energy sources may be the most cost-effective at the moment but may also turn out to have unanticipated system-level challenges down the line.

With the goal of paradigm shifts in mind, investors can then focus on the system-level characteristics (i.e., adaptability, clarity, connectivity and directionality) to monitor and manage their impacts and begin to assess their influence on them. They can do this by assessing system-level issues appropriate for their consideration and establishing effective goals for influence against which to measure progress.

A key benefit of this process is investors can measure whether they are using system-focused investment strategies in ways that can lead to collaborative action. Through the collective actions of a diverse set of investment community members, each using a variety of tools in differing ways, sufficient leverage can be achieved to exercise influence within today’s complex, global, interconnected systems.

The collective action dimension is why investors like APG and PGGM have spent so much time and effort not just developing their own strategies, but also inviting other investors to partner and learn with them—accelerating investment, government action and measurement of progress. It is the latter point that can serve as a foundation upon which investors can base consistent, system-wide impact over time. It is also how investors can fortify returns over the long term.

William Burckart is the president and COO of The Investment Integration Project (TIIP), and a visiting scholar at the U.S. Federal Reserve.

Steve Lydenberg is the founder and CEO of TIIP, and a partner at Domini Impact Investments. TIIP’s role is to catalyze, collaborate and create research that will make systems-level considerations simpler and easier for institutional investors. www.TIIProject.com

Photo credit: U.S. Department of Agriculture / Flickr.