There are as many investment strategies as there are investment opportunities. Some are good; many are terrible. Here we propose a strategy that takes a system perspective and aims to optimize the systemic value created by the investment.
Photo by Markus Spiske
The traditional investing approach and its impact Financial industry has long been dominated by investment that is aimed at multiplication of capital. The major concern in terms of the investment is profit by using money to make money. Return and risk are the two pillars to be considered when it comes to investment decision-making.
Investment in business with the sole pursuit of profit inevitably has led to extensive environmental and social degradation.
Environmental systems have been in an accelerated decline, as population and the economy continue to expand, and inequality and many other social problems have risen rapidly. These negative environmental and social impacts oftentimes have resulted in harm on companies, in the form of market rejection, lawsuits and reputation damage, and therefore increased risk on investment.
In the one the left, one can see a progressive increase in returns as one moves out along the risk axis progressing from venture philanthropy to various potential investment firms/funds offering differing levels of financial return to the investor. One can also observe how the relative degree of impact increases as we move from a bond offered by the U.S. Treasury to traditional venture investing and finally then to clean tech or microfinance investing.
Environmental and social issues have become increasingly important for long-term investors as businesses are not independent of the larger environmental and social systems that contain and sustain them. How these issues impact financial value, in a positive way or a negative way, are what concerns those investors. To maximize long-term value, impact has been added as a key pillar in the decision-making process for investment in addition to return and risk . A shift of investment approach toward impact and sustainability integration beyond the traditional investment have taken place.
A variety of investment approaches are visible in practice. A categorization of these new investment approaches into responsible investing, sustainable investing, impact investing and philanthropy investing other than the traditional approach has been made in line with differed goals and intentions according to Enclude report.
However, this categorization has not become the common rule. These terms are often in varied use by different users referring to the general new approaches as a whole, that differ with the traditional approach, owing to the consideration of environmental and social impacts. They are oftentimes interchangeably applied with other terms, e.g. ESG investing, socially responsible investing, and the triple-bottom-line approach. Despite the categorization, sustainable investing, named here referring to the general new approaches on a broad sense, has undergone a rapid rise on a global scale.
UNDP has outlined a blueprint with 17 SDGs to work with in order to deal with ongoing societal challenges and build a better future, a more sustainable and just society for all. A massive investment gap, estimated at around trillions of Euros per year, needs to be closed in order to achieve SDGs. Sustainable investing is expected to be more effective than the traditional investment at deploying capital for solving today’s greatest challenges, e.g. climate change, water scarcity and social inequality, and achieving greater sustainability, equity and justice.
Sustainable investing, an ultimate solution for desired changes?
Sustainable investing is supposed to be a way forward in dealing with a variety of complex challenges facing the world today. This is in line with an aspiration to safeguard human civilization rather than the money multiplication motive of traditional capital. However, a dispute, regarding the purpose of a company profit above everything else or producing solutions to the planet and society in the process to make money, has come up as it is perceived that some financial return needs to be sacrificed in doing so to make the world a better place. However, this is not necessarily true. Research has pointed out that profits and purpose are inextricably linked, and companies could improve their financial performance by addressing ESG issues. The positive relationship between high performance on ESG issues and excellent financial performance has been confirmed.
Business and investing can make money by doing good. But two questions come up, to what extent it can contribute to reduced environmental and social impacts and could we expect to deliver SDGs through sustainable investing. It is estimated that business could mitigate about 20% of short-term and long-term negative environmental and social impacts in a profit-neutral or profit-enhancing manner as nearly all sustainable investment focuses on addressing environmental, social and economic symptoms not the root causes of the environmental and social impacts of economic activities addressed by SDGs. It would be hard to expect business to do more in competitive markets under the existing economic and political systems due to specific systems flaws, e.g. externalities, time value of money, and limited liability. Sustainable investing alone is not enough to deliver the desired changes. Most of the ongoing sustainable investing is failing to consider the broader system and therefore has reduced potential to cope with negative impacts.
Systems approach to make sustainable investing truly sustainable
Systems thinking needs to be incorporated into sustainable investing to address systems flaws and to maximize the scale and scope of the impact that can be created. It creates opportunities to generate purposeful interventions, that drive non-linear amplification in complex systems, incl. through investments in infrastructure, technology start-up, insurance products, public subsidy schemes, or other capital deployment mechanisms. It is often the case in practice that a combination of multiple forces working together, instead of a single intervention alone, contribute to the systems transformation. Key to effective systemic investing is therefore the composition of portfolios of assets that can connect to each other, well-aligned with a broader set of systems interventions and have the potential to create synergies to unlock or accelerate transformational effects. In other words, systemic investing requires a paradigm shift away from single asset one to a strategic blending one. Combining sustainable investing with systems thinking, i.e. systemic investing, can create change dynamics that propel a system in a specific direction. It does and will play a critical role in addressing the most pressing and tangible problems of our time and accelerating the delivery of SDGs.
In implementing systemic investing, it seeks to better understand underlying causes to social and environmental problems and to identify high leverage solutions to advance positive systems change based on a holistic approach that focuses on how parts of a broader system connect and relate to one another and where synergies exist. Recognizing the complexity of issues facing our world today, we have the chance to develop more complete views and to make better investment decisions. This approach can steer our investment decisions towards true profit and true benefits both environmental and social. It is supposed to be a sort of more effective long-term investing aiming at chipping away at the root causes within the system for transformative change.
Thus investment should turn to systems-approach-based solutions to SDGs that aim to improve the very systems that produced the problems in the first place instead of business-as-usual business practice, carried on based the prevalent reductionistic thinking, that merely treats symptoms if the rest 80% of the negative impacts are targeted to further mitigate and SDGs are truly achieved.