PRI and TIIP on working to build a sustainable financial system

Note: This article originally appeared on UN PRI’s website and is reproduced here in its entirety.
As part of the PRI’s 10-year Responsible Investment Blueprint, we are about to start an ambitious programme that will bridge the gap between the financial system of today and the sustainable financial system of tomorrow. The Sustainable Financial System programme will address the risks and challenges that undermine the sustainability of the current financial system by putting in place a series of steps that will lead to change in the system – with a particular focus on institutional investors and the intermediated investment chain.

On 29 March the PRI and The Investment Integration Project (TIIP), a financial research organisation that helps institutional investors understand the big picture, or “systems level” context of portfolio-level decisions, is holding an event at IEX in New York. It will bring investors and stakeholders together to discuss what changes need to be made to promote and support a sustainable financial system.

The PRI’s Sustainable Financial System programme will be set out in the soon to be released Blueprint. Ahead of the event, the PRI talked with TIIP’s CEO Steve Lydenberg and President and COO Bill Burckart about how they help institutional investors see the important connection between portfolio-level decisions and the larger systems that affect them.

Q – Can you tell us about the TIIP initiative and what you’re aiming to achieve?
A: TIIP works with long-term investors to help them understand how, and to what extent, investment decision making impacts environmental, societal and financial systems, and how these systems in turn impact the investors themselves. Maintaining these systems is increasingly important and we believe it is difficult to manage portfolios without an eye to the impacts of systems on portfolios and vice-versa.

Q –TIIP’s work is based on systems thinking. Why is it relevant to investors?
A: Our work looks at three systems – environmental, societal and financial – and how they interact with each other. Environmental and societal systems are important for investors because these are the structures around the financial community. A lot of emphasis is put on the risk from these systems, but they are sources of wealth generation and clearly sources of reward for investors. Having said that, they can also go off course. As we have seen with the financial crisis in 2008 and the uncertainty associated with climate changes, damages to those systems poses a risk. Yet an issue like poverty alleviation, is a potential source of reward for all investors. What we do is look at these systems, what issues arise as a systems concern, whether they have an impact on investors and what impact that investors have on the system.

Q – Can you tell us about what is going on in the industry?
A: We’ve analysed 50 asset owners and asset managers in our State of the Industry Analysis: Tipping Points 2016. The three key trends in the industry are:

  1. Investors are taking a series of “on-ramps” to get to systems level investing, such as ESG integration, impact investing, long-term value creation and universal ownership. These are the most likely pathways to get to systems-level investment.
  2. Once these activities mature, they can in many cases lead to systems level investing. Within these pathways there are a subset of strategies that are being practiced, which we call the “Ten Tools of Intentionality” – these 10 tools are the intentional decisions or the deliberate choices to engage in one approach or another – that get you to systems level thinking. Examples of these tools are “additionality”, where investors consider the net benefits of their investments to society or a region, “solutions”, where investors have identified particular areas where disruption is needed and investments are designed to solve a problem.
  3. Investors are pursing systems type investing through these “on-ramps” and strategies of intentionality, and these approaches can be integrated into traditional investment activities, from portfolio construction and security selection, to manager selection, investment belief statements and targeted investment programmes. These established tools of investment are being used to pursue system goals. The tools of intentionality can be integrated into core investment processes, as well as being activities that complement traditional portfolio management techniques.

Q – What do you think are the key barriers to investor awareness and action on systemic risks and using system approaches?
A: We all know that the $250 trillion in investable assets around the world clearly has an effect on the environment, society and the financial systems themselves. But many believe that an individual investor doesn’t or can’t have influence on the system. What investors need to collectively understand, though, is that they can have impact through intentional action. With such action the potential for the financial industry to manage risk and opportunities at the systems level is real.

At a more practical level, the State of the Industry analysis found three challenges:

  • The quality of systems-level data is lacking. While a lot of tools have been developed to give investors insight into ESG issues at the portfolio level, not a lot of progress is being made at the systems level.
  • There is an overwhelming need to educate staff, clients and other key stakeholders on the nature and materiality of systems level concerns.
  • The way in which to create and measure change at company and systems level is not always clear.

Q – What can asset owners and asset managers do to bridge the gap between portfolio and systems-level thinking?
A: Put simply: through tackling the three challenges above. Systems level data should make it clear to investors the feedback loops that take place in the system and the impact they have on investment. The various tools TIIP has developed are a way that investors can visualise the actions that can be taken.

At a practical level, it’s a cultural question of what will get investors moving towards considering system level issues. It’s about the tools that match asset owners and asset managers. As an asset manager, if you’re responding to an RFP and an asset owner is thinking in a systems way, then you will naturally match to win business. Asset owners need to get better at identifying asset managers who are familiar with attempting to address systems level considerations.
TIIP is trying to address these gaps with tools like basic benchmarking and implementation guides.

We are also focusing on three areas – intentionality, measurement, and scenarios. Intentionality is about building knowledge around and socialising the ten tools. Measurement is about how investors can begin to understand what set of indicators and metrics are actually relevant for a systems level approach. Scenarios is about helping investors see what systems thinking looks like in investment strategies and practices.

Q – What is coming up in the next couple of months?
A: On the event side, we are jointly hosting an event in March with PRI in New York about our systems level approaches and PRI’s Sustainable Financial System programme. TIIP will have subsequent events in July and December.

PRI signatories can also access TIIP’s research portal. This platform provides investors with resources that will help with better matching asset owners and asset managers, benchmarking and market analysis, and it provides implementation guides for systems level thinking.

With research, we will be releasing our “frameworks” paper in February, which helps investors with a set of guidelines for identifying relevant systems-level considerations and gives illustrations on how they might analyse them within their investment processes. Additional reports are in the pipeline for release later in the year.

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