21st Century Investing

21st Century Investing Plot Summary

Introduction

The world of investing is at an inflection point. For decades, conventional investment wisdom has focused almost exclusively on maximizing financial returns through portfolio-level risk management. This approach, while sophisticated in its financial metrics, has largely ignored the broader impacts investments have on social, environmental, and financial systems. As our global challenges grow increasingly complex and interconnected, this conventional paradigm proves inadequate for navigating 21st century realities. A paradigm shift is emerging - one that recognizes investors as active participants in shaping the health and resilience of the systems upon which their long-term returns ultimately depend. This systemic approach doesn't replace traditional portfolio management but extends it to acknowledge feedback loops between investment decisions and the stability of environmental, social, and financial ecosystems. By managing risks and opportunities at the system level, investors can protect against threats that portfolio diversification alone cannot address, while simultaneously generating positive impacts that create a rising tide of sustainable returns. Through careful examination of practical implementation strategies and real-world case studies, we explore how investors of all types can evolve their practices to meet the complex challenges of our time.

Chapter 1: From Conventional to System-Level Investing: A Paradigm Shift

The evolution of investment thinking has followed a logical progression over the past several decades. Conventional investing, founded on modern portfolio theory, focuses primarily on maximizing returns through portfolio diversification and risk management at the security level. This approach assumes that systematic risks—those inherent to entire markets—are beyond investors' control and therefore should be accepted as given. Under this paradigm, investors can only be rewarded for taking on idiosyncratic risks that can be managed through proper diversification. However, the 2008 financial crisis challenged this fundamental assumption by revealing how investors' collective behavior could indeed destabilize entire financial systems. This recognition opened the door to questioning whether investors might similarly impact social and environmental systems through their allocation decisions. Meanwhile, the explosive growth of global financial markets—now representing over $360 trillion in wealth—has given the investment community unprecedented influence over these systems, whether they acknowledge this responsibility or not. Sustainable investing emerged as an initial response to these realizations, intentionally integrating environmental, social, and governance (ESG) considerations into investment decisions. This approach recognizes that poorly managed ESG factors introduce portfolio risks, while well-managed factors can create opportunities. Yet sustainable investing primarily remains focused on portfolio-level impacts rather than addressing systemic challenges holistically. System-level investing takes the next logical step by explicitly acknowledging that investors impact—and are impacted by—the health of the social, financial, and environmental systems that underpin all investment returns. It recognizes that when these systems become destabilized, no amount of portfolio diversification can fully protect against the resulting risks. Climate change, income inequality, and financial system instability exemplify such systemic challenges that transcend individual portfolio management. Adopting a system-level approach requires investors to expand their understanding of fiduciary duty beyond short-term portfolio maximization to include stewardship of the systems on which long-term returns depend. Rather than viewing the market as something external that investors simply react to, system-level investing acknowledges that markets themselves are human constructions that can be intentionally shaped to better serve society's long-term interests. The transition to system-level investing doesn't require abandoning traditional financial analysis, but rather complementing it with broader considerations. By setting explicit goals for systems impact, focusing on crucial leverage points within those systems, and measuring progress toward system-level outcomes, investors can fulfill their fiduciary responsibilities more comprehensively while contributing to a more sustainable economy.

Chapter 2: The Three Systems: Social, Financial, and Environmental Pillars

System-level investing centers on three interconnected foundational systems that together form the bedrock of sustainable investment returns: social, financial, and environmental. Each of these systems faces unique challenges in the 21st century that conventional investment approaches fail to adequately address. Social systems encompass the human elements that enable productive economic activity—healthcare, education, fair employment, consumer safety, and social justice. When these systems function well, they provide the stable social foundations necessary for long-term value creation. However, extreme income inequality has emerged as a particularly destabilizing force within social systems. As wealth concentrates among fewer individuals, social cohesion deteriorates, political extremism rises, and economic growth becomes constrained by insufficient broad-based consumer demand. Research from institutions like the International Monetary Fund demonstrates that extreme inequality actually hampers economic growth and investment returns across asset classes. Financial systems provide the mechanisms for allocating capital efficiently throughout the economy. The banking crisis of 2008 revealed how these systems can become dangerously unstable when short-term profit incentives overwhelm longer-term considerations. The proliferation of complex financial instruments, combined with blind faith in market efficiency, created systemic vulnerabilities that threatened the entire global economy. A system-level approach recognizes that financial markets require thoughtful stewardship, transparency, and appropriate regulation to function as intended rather than being left to theoretical "invisible hands." Environmental systems provide the natural resources and ecological services upon which all economic activity ultimately depends. Climate change represents the most profound systemic risk to these systems, but other environmental challenges including biodiversity loss, water scarcity, and resource depletion also threaten long-term economic stability. The Cambridge Institute for Sustainability Leadership has determined that climate-related risks can only be partially mitigated through portfolio reallocation—the remainder requires systemic solutions that conventional investment approaches don't address. The interconnectedness of these three systems creates cascading effects that amplify risks and opportunities. For example, environmental degradation can trigger social instability, which then threatens financial system integrity. Similarly, improvements in one system can create positive ripple effects across others. This interdependence means investors cannot effectively manage risks by considering these systems in isolation. System-level investors recognize that the health of these foundational systems directly impacts their ability to generate sustainable returns across all asset classes and time horizons. They understand that while conventional portfolio management focuses on extracting value from existing systems, system-level investing also requires nurturing those systems to ensure their long-term vitality and resilience.

Chapter 3: Setting Intentional Goals for System-Level Impact

Establishing clear, intentional goals represents the first critical step in system-level investing. Unlike conventional investors who focus exclusively on portfolio-level financial returns, or sustainable investors who primarily seek to align their portfolios with their values, system-level investors explicitly aim to influence the health and resilience of fundamental systems. This requires a more comprehensive goal-setting framework that incorporates both financial performance and systemic impact. System-level goals target the underlying paradigms that shape how systems function. These paradigms represent the deep structures, assumptions, and mental models that determine system outputs. For example, rather than simply investing in renewable energy companies, system-level investors might set a goal of contributing to a paradigm shift away from fossil fuel dependence throughout the global economy. This more ambitious goal recognizes that transforming energy systems requires changes in infrastructure, policy, consumer behavior, and market incentives beyond what portfolio allocation alone can achieve. Effective system-level goals should be specific enough to drive concrete action while addressing issues of sufficient magnitude to warrant a systemic approach. Income inequality, climate change, financial system stability, healthcare access, and water security exemplify appropriate targets for system-level goals because they meet four essential criteria: they have achieved broad consensus regarding their importance; they have relevance across multiple asset classes and industries; they can be meaningfully influenced by investor action; and they involve uncertainties that conventional risk management techniques cannot adequately address. When setting system-level goals, investors must acknowledge the limits of individual action. No single investor, regardless of size, can transform complex global systems alone. Therefore, system-level goals often focus on contributions to collective progress rather than claiming direct causation of system-wide outcomes. For instance, the Climate Action 100+ initiative—comprising 373 investors with $35 trillion in assets—collectively engages with the world's largest greenhouse gas emitters to secure commitments for emissions reductions consistent with Paris Agreement targets. Goal setting at the system level also requires longer time horizons than conventional investing typically employs. Meaningful systems change occurs over years or decades rather than quarters. This extended timeframe actually aligns well with the long-term obligations of many institutional investors, particularly pension funds and endowments with multi-generational responsibilities. The process of setting system-level goals can catalyze important organizational conversations about purpose, responsibility, and long-term value creation. These discussions often reveal that what initially appears to be a tension between financial returns and systemic impact actually represents a false dichotomy—in the long run, financial returns depend on healthy systems, making system-level investing a form of enlightened self-interest rather than philanthropy.

Chapter 4: Investment Tools and Techniques for Systemic Change

Implementing system-level investing requires expanding the investor's toolkit beyond conventional portfolio management techniques. While traditional approaches focus primarily on security selection and asset allocation to optimize risk-adjusted returns, system-level investing employs additional tools specifically designed to influence the health and resilience of fundamental systems. Asset allocation, the foundation of conventional portfolio management, takes on new dimensions in system-level investing. Beyond balancing risk and return, system-level investors consider how different asset classes can serve distinct functions in addressing systemic challenges. For instance, public equities provide opportunities to engage with large corporations on industry-wide standards; fixed income can direct capital to public goods and infrastructure; venture capital can accelerate disruptive innovations; and real assets can demonstrate sustainable models for the built environment. The California State Teachers' Retirement System exemplifies this approach with its Low-Carbon Index for passive equity management, which systematically reduces carbon exposure across global markets while maintaining broad diversification. Engagement strategies expand beyond traditional shareholder activism to address systemic issues collectively. Rather than focusing exclusively on company-specific practices, system-level investors coordinate engagement efforts across entire industries and value chains. The Church of England Pension Board's initiative following the Vale dam collapse in Brazil illustrates this approach—moving beyond engagement with a single mining company to establish industry-wide standards for tailings dam safety and transparency in partnership with other investors and stakeholders. Policy advocacy emerges as a crucial but often overlooked tool for system-level investors. Recognizing that public policy shapes market structures and incentives, forward-thinking investors leverage their influence to support policies that strengthen system resilience. This might include advocating for climate disclosure requirements, financial market reforms, or social protections that create more stable operating environments for businesses and investors. The investment firm Aviva exemplifies this approach through its systematic engagement with policymakers on sustainable finance frameworks. Collaborative initiatives amplify individual investors' impact on systems. These collaborations pool resources, expertise, and influence to address challenges beyond any single investor's capacity. The Climate Action 100+ initiative demonstrates how collaborative engagement can drive commitments for emissions reductions from the world's largest corporate emitters. Similarly, the UN Principles for Responsible Investment facilitates collaboration on a range of system-level challenges while building shared knowledge bases and standards. Field-building activities strengthen the overall infrastructure for system-level investing. This includes developing metrics, research, databases, and investment products that facilitate system-level approaches. CalPERS' Sustainable Investment Research Initiative Library exemplifies this approach by compiling and sharing academic research on sustainable investing, creating a public knowledge resource that benefits the entire investment community. These tools gain power when deployed in combination rather than isolation. The New Zealand Superannuation Fund illustrates this comprehensive approach to climate change through its integrated strategy: allocating assets to low-carbon investments, engaging with high-emissions companies, advocating for supportive policies, collaborating with other investors, and building the field through research and standards development. This diversity of approaches reflects the complexity of the systems being addressed and increases the likelihood of meaningful impact.

Chapter 5: Measuring System-Level Progress: Beyond Portfolio Returns

Measuring progress at the system level presents unique challenges that extend beyond conventional performance evaluation. While traditional investment assessment focuses primarily on financial returns relative to benchmarks, system-level investing requires evaluating both portfolio performance and contributions to system health and resilience. This more comprehensive approach to measurement helps investors understand whether their actions are effectively influencing the systems on which their long-term returns depend. System-level measurement begins with clear principles rather than rigid metrics. Michael Quinn Patton's "principles-focused evaluation" framework provides a useful starting point, examining whether principles are clear and actionable, whether they are being followed, and whether they are producing desired results. This principles-based approach accommodates the complexity and unpredictability of systems change while maintaining accountability for progress. Effective measurement frameworks assess the consistency between investors' stated beliefs, actions, and outcomes. This consistency represents a crucial indicator of genuine commitment to system-level impact rather than superficial "greenwashing." For example, an investor claiming to address climate risks would demonstrate inconsistency by simultaneously lobbying against climate policies or maintaining significant fossil fuel investments without a clear transition strategy. This holistic assessment helps distinguish authentic system-level investors from those merely seeking to insulate their portfolios from specific risks. Qualitative judgment plays an essential role in system-level measurement, complementing quantitative metrics. Complex systemic challenges like income inequality involve multiple interconnected factors that cannot be reduced to simple numerical indicators. Skilled judgment becomes particularly important when contending with the unpredictable consequences of interventions in complex systems. The financial crisis of 2008 demonstrated the dangers of over-reliance on quantitative models at the expense of qualitative judgment—a lesson equally applicable to system-level investment. Meaningful system-level measurement tracks progress at multiple levels: the contributions of individual investors, the alignment of key stakeholders within systems, and ultimately the health and resilience of the systems themselves. Investors might assess their contributions by documenting participation in collaborative initiatives, policy advocacy efforts, or field-building activities. They might track stakeholder alignment through industry-wide commitments to standards or best practices. And they might monitor system health through broad indicators like greenhouse gas emissions trajectories, income distribution patterns, or financial system stability metrics. Importantly, system-level measurement recognizes the inherent worth of social and environmental systems beyond their instrumental value to investors. While sustainable investing often attempts to justify ESG considerations solely through a "business case" based on financial materiality, system-level investing acknowledges that healthy systems have intrinsic value that may not be fully captured in market prices. This recognition helps investors avoid extracting unsustainable value from systems while supporting their long-term viability. The development of robust measurement frameworks for system-level investing remains a work in progress. However, pioneering efforts like the Impact Management Project, the IRIS+ system, and various initiatives from the investment community are establishing foundations for more comprehensive approaches to measuring system-level progress.

Chapter 6: Case Study: Addressing Income Inequality Through Investing

Income inequality represents one of the most challenging systemic issues confronting investors in the 21st century. The growing gap between the wealthy and the rest of society creates social instability, weakens economic growth, and ultimately threatens investment returns across asset classes. Research from institutions like the International Monetary Fund has demonstrated that extreme inequality actually hampers economic growth by constraining consumer demand and creating financial system vulnerabilities. The Cambridge Centre for Risk Studies has projected that social unrest stemming from inequality could reduce U.S. equity portfolio values by up to 22.69% under severe scenarios. Income inequality's systemic nature stems from three interconnected market failures that conventional investing often exacerbates rather than addresses. First, corporate "fissuring" has severed connections between companies and their workers as firms increasingly outsource non-core functions to reduce costs. Second, executive compensation tied primarily to stock performance has skyrocketed, with CEOs now earning hundreds of times more than average workers. Third, aggressive corporate tax avoidance strategies have weakened governments' ability to provide services and infrastructure that support broad-based prosperity. System-level investors can address these market failures through multiple complementary approaches. Regarding labor relations, investors can support standards for fair treatment of workers throughout corporate value chains. The Workforce Disclosure Initiative exemplifies this approach, with over 100 institutional investors collectively advocating for standardized reporting on wages, benefits, training, and labor conditions. Similarly, investors increasingly adopt "responsible contractor policies" for real estate and infrastructure investments, promoting fair compensation and working conditions rather than engaging in a race to the bottom on labor costs. On corporate taxation, forward-thinking investors are shifting the paradigm away from aggressive tax avoidance. Norges Bank Investment Management's position paper on taxation explicitly states that "maximizing long-term value does not require aggressive tax behavior" and expects corporate boards to "discourage the pursuit of aggressive tax avoidance not in shareholders' long-term interest." This approach recognizes that investors ultimately depend on the infrastructure and services that tax revenues support. Regarding executive compensation, investors are increasingly challenging excessive CEO pay disconnected from broader stakeholder interests. France's public pension manager ERAFP has established a "socially acceptable maximum" for executive compensation at 100 times the minimum wage, recognizing that extreme pay disparities undermine social cohesion. More broadly, investors are voting against excessive compensation packages even at financially successful companies, signaling that pure financial metrics are insufficient for evaluating executive performance. Implementing these approaches requires investors to balance short-term financial considerations with long-term system health. Allocating assets across traditional classes presents opportunities to address inequality: public equities provide access to engage large corporations on labor and tax practices; government bonds can strengthen social safety nets; and real estate investments can support affordable housing and union labor. Meanwhile, new techniques specifically designed for system influence—including self-organization with like-minded investors, evaluations that recognize the inherent worth of social cohesion, and policy advocacy for minimum wage standards and tax enforcement—can create more fundamental change. This case demonstrates how system-level investing extends beyond merely insulating portfolios from inequality's risks to actively strengthening the connections between corporations, employees, and governments that foster a more balanced and sustainable economy. By doing so, investors contribute to a rising tide of competitive investment opportunities while creating a more stable society for all.

Chapter 7: Pathways to Transition: Models for Implementation

The transition to system-level investing follows multiple pathways depending on investors' starting points, specific concerns, and institutional contexts. Six distinct but complementary models have emerged as investors expand their approach beyond conventional portfolio management to incorporate system-level considerations. The universal owner model, exemplified by Japan's Government Pension Investment Fund, recognizes that large institutional investors effectively "own the economy" through their diversified holdings across all asset classes. These investors understand that their returns ultimately depend on the health of the economy as a whole rather than outperformance of specific securities. This recognition naturally leads them to address systemic risks that cannot be diversified away and to collaborate with other investors on issues like climate change that affect all portfolios. As Japan's GPIF states, "the longer the investment horizon is, the greater the risk-reduction effect becomes" from addressing environmental and social challenges. The stewardship model, illustrated by the Church of England Pensions Board, views investors as responsible stewards of their assets with obligations extending beyond simple buy-and-sell disciplines. This approach acknowledges ownership responsibilities to consider the financial implications of practices with ethical dimensions, transcending narrow market-based thinking. The Church of England's Stewardship Implementation Framework explicitly targets "systemic or strategic interventions that will have a wider impact than standard corporate engagement," including leadership in investor coalitions addressing climate change and mining safety standards. The long-term value creation model, practiced by Norway's sovereign wealth fund, emphasizes building sustainable returns over multi-generational timeframes. This approach naturally aligns with system-level thinking because the further investors extend their time horizons, the more their interests converge with broader societal well-being. Norway's fund explicitly aims to "safeguard and build financial wealth for future generations" by setting clear expectations for companies across industries regarding climate change, human rights, tax transparency, and ocean sustainability. The impact investing model, pioneered by organizations like the KL Felicitas Foundation, intentionally generates measurable social and environmental impact alongside financial returns. Forward-thinking impact investors extend their approach to address systemic conditions by building field infrastructure, supporting networks of impact intermediaries, and developing standards and measurement frameworks that facilitate system-level change. This model demonstrates how even relatively small investors can contribute to system health through strategic capital deployment. The ESG integration model, exemplified by the insurance giant Allianz, systematically incorporates environmental, social, and governance considerations into investment processes across all asset classes. Leading practitioners extend this approach beyond portfolio risk management to influence broader systems through standard-setting, collaborative engagement, and policy advocacy. Allianz applies its ESG integration framework across its operations as asset owner, asset manager, and insurer, creating a comprehensive approach to system influence. The standards-setting model, illustrated by the Rockefeller Brothers Fund's fossil fuel divestment initiative, establishes minimum thresholds for acceptable business conduct and excludes companies or industries that fail to meet these standards. This approach makes powerful statements about values and creates pressure for system-wide change. When institutions with meaningful connections to problematic industries divest—as the Rockefeller fund did from fossil fuels despite its origins in Standard Oil—the symbolic impact amplifies the financial signal. These models are not mutually exclusive but rather represent complementary facets of system-level investing. Many institutions combine elements from multiple models as they develop their approach. The transition process typically begins with incremental steps—perhaps commissioning research on systemic risks, adjusting investment beliefs statements, or joining collaborative initiatives—before expanding to more comprehensive implementation. Whatever the starting point, system-level investors share the common goal of strengthening the social, financial, and environmental systems on which their long-term returns depend. By taking this more holistic approach, they bridge the gap between conventional portfolio management and the systemic challenges of the 21st century.

Summary

The paradigm shift toward system-level investing represents a natural evolution in how investors understand their role and responsibilities in an increasingly complex, interconnected world. By extending conventional portfolio management to incorporate intentional management of systemic risks and rewards, investors can protect and enhance the foundational systems on which their long-term returns ultimately depend. This approach recognizes that the most significant threats to investment performance—climate change, income inequality, financial instability—cannot be diversified away or addressed through security selection alone. Instead, they require collaborative action to transform underlying systems. The implementation of system-level investing need not be revolutionary or disruptive to existing investment practices. Rather, it builds incrementally on familiar tools and techniques while extending them to address broader concerns. Setting explicit goals for system impact, focusing on issues of genuine systemic importance, allocating assets with system functions in mind, applying traditional investment tools to systemic challenges, leveraging specialized techniques for system influence, and measuring progress beyond portfolio performance—these steps form a practical pathway that any investor can begin following today. As forward-thinking institutions from Japan's Government Pension Investment Fund to the Church of England Pensions Board to the Rockefeller Brothers Fund demonstrate, the transition to system-level investing is already underway across diverse contexts. Their pioneering efforts illuminate multiple paths toward the same destination: investment practices that generate competitive returns while contributing to the health and resilience of the systems on which those returns depend.

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William Burckart

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