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System change investing – A new approach to ESG

By May 11, 2023May 15th, 2023No Comments

The world is changing, and it’s changing quickly, as we face global systemic threats, from climate change to inequality to loss of biodiversity. Even as investors looking to finance a transition to a more sustainable future focus on these challenges, many recognize that ESG strategies alone will not be enough because they fail to address the root causes of the problems – the economic and political systems that underpin society.

According to Kevin Dixon, Founder of Global System Change, ESG strategies are flawed because they set up a paradox – they ask companies to voluntarily stop harming the environment and society, while those companies operate within systems that reward harmful behavior. Thus, he says, “beyond a certain point, voluntary corporate responsibility equals voluntary corporate suicide.” Taking a different approach, some investors are turning to system change investing, the latest evolution of ESG investing, to engage the corporate and financial sectors in changing these fundamental systems.

System change investing is an investment strategy that takes a systems-level perspective, examining how a company’s investments and operations interact with the environment and how they affect the social and economic landscape. System change investing goes a step further than traditional ESG investing, which is focused at the company level, by considering the impact of a company’s activities on the environment, society and the economy as a whole. By taking this broader view, system change investing can identify and invest in companies that are driving positive systemic change.

System change investing also considers the potential for future impact by seeking to identify companies that are likely to contribute positively to the environment and society in the long-term, rather than just focusing on short-term gains. This long-term focus means that companies will be held accountable for their environmental and social impacts, and that investors can make informed decisions about which companies are most likely to make a positive contribution to the world.

High Meadow Institute Fellows Steve Lydenberg and William Burckart of The Investment Integration Project (TIIP) have also been working extensively in the system-level investing space, encouraging investors to adopt a system-level investing perspective and consider the bigger-picture social, environmental, and financial system context of their investment decisions. You can learn more about this through their website and their book, 21st Century Investing: Redirecting Financial Strategies to Drive Systems Change.

Ultimately, system change investing may be the most significant form of ESG transformation. In looking beyond traditional ESG metrics to consider a company’s broader impact on people, the planet and the broader economy, it can identify companies that are driving positive systemic change and having long-term impact. For investors looking to make a real and lasting difference, system change investing is an important approach to consider.