Systems-Level Considerations and the Long-Term Investor: Definitions, Examples, and Actions

frameworks_report_coverThis Occasional Paper from The Investment Integration Project (TIIP) addresses the question of how asset owners and managers can identify environmental, societal and financial systems-level issues relevant to their investment processes. Integration of these systems-level considerations can help investors manage long-term risks and rewards while seeking competitive portfolio-level returns.

The primary questions addressed in this paper are:

  • What are the characteristics of environmental, societal and financial systems-level issues that make them relevant to long-term investors for integration into investment processes?
  • What are examples of these systems-level issues that rise to the level of significance for such consideration and how in practice can that level of significance be determined?

Four guidelines that can help long-term investors determine the relevance of systems under consideration are proposed:

  • Breadth of consensus as to the importance of the system under consideration
  • Potential of the feedback loops from the system to impact the investor’s portfolios positively or negatively
  • Potential for the investor’s policies and practices to impact the system positively or negatively
  • Degree of uncertainty about the potential outcomes that would ensue from fundamental disruptions at the systems level

The paper examines six examples of systems-level issues that share these characteristics.

Within broad environmental systems, the paper looks at the issues of:

  • Climate change
  • Access to fresh water

Within broad societal systems, it looks at the issues of:

  • Well-being: poverty alleviation and access to healthcare
  • Dignity: human and labor rights

Within broad financial systems, it looks at the issues of:

  • Stability and credibility
  • Transparency of sustainability data

Resolution of the question of which issues do and do not appropriately rise to the level of systems-level consideration is crucial for institutional investors because issues with too narrow a focus may prove irrelevant, ineffective or even potentially detrimental to their management of long-term risks and rewards.

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