Five reflections on systems-level investing

What began as a chance conversation on the margins of a birthday party led to a conversation about investment, policy, systems, and influence; and a collaboration between the Church of England Pensions Board, the SSEE’s Sustainable Finance Group and Green Templeton College to bring together responsible investment practitioners, students and researchers to discuss a new book – "The Handbook of System Level Investing" by William Burckart and Jon Lukomnik.

Systems-level investing is a field in formation. SLI does not yet have widely accepted norms or established practices, but it does invite investors to think carefully about their influence (within and beyond capital markets), and their limits.  Some influence can be brought to bear through stewardship, engagement, and capital allocation. Change will also depend on broader shifts in policy, regulation, and social norms, which investors can contribute to in their own way. Determining where investors can act directly and where they must rely on collective action remains a central challenge of the field.

In many ways, SLI resembles a large-scale change management project. Internally, organisations will need to develop the capacity to think at a system level. Horizontally, SLI will be supported and reinforced by coordination through coalitions such as the UN backed Principles for Responsible Investment, Net Zero Asset Owner Alliance, the Global Investor Commission on Mining 2030, and other leadership groups. Vertically, alignment is needed throughout the investment chain, from asset owners and asset managers to the various service providers and initiatives that help frame and inform investment decisions.

The investment chain is made up of actors with different incentives, time horizons, risk tolerances, and definitions of success. Asset owners may take a long-term, universal-owner perspective, recognising that systemic risks can affect entire portfolios over different timeframes, and impact their returns for generations of beneficiaries. On this understanding, adopting strategies that seek to influence entire sectors, disclosure regimes, or allocations would be a natural fit. Asset managers, by contrast, are often evaluated on and incentivised by shorter-term performance metrics. Similarly, while asset owners may be concerned with long-term system resilience, the companies in which they invest are frequently driven by quarterly earnings pressures and near-term shareholder expectations.

There are interesting power dynamics at play here. Although asset owners are formally the clients and sit at the top of the investment chain, much of their influence is through the exercise of ‘soft power’ and collaboration, because switching asset managers can be costly and disruptive. As a result, individual asset owners may have less direct influence over manager behaviour than formal governance arrangements suggest, weakening the transmission of systems-level objectives through the investment chain. 

Systemic risks are shaped not only by corporate behaviour, but also by laws and regulations. As a result, systems-level investing inevitably enters the realm of policy, regulation, and politics - a space many investors have historically been reluctant to enter.

Reducing exposure to systemic risks may therefore require investors to engage more directly with policy processes than many institutions are accustomed to. Addressing these risks raises difficult questions about how investors should engage with policymakers and how they should respond when the lobbying activities of others in the investment chain, including portfolio companies, run counter to their stated systems-level objectives.

Working in the world of policy raises questions of legitimacy. Asset owners need clarity about why systems-level engagement is consistent with their beneficiaries’ interests, and fiduciary responsibilities. Without a clear rationale, interventions can easily be dismissed as political activism rather than prudent long term risk management.

Accusations of politicisation often arise because reducing systemic risk creates costs for particular actors. Such conflicts do not undermine the evidence on systemic risks; they reflect the reality that managing them produces winners and losers. The challenge is not to avoid politics, but to engage with political processes transparently, credibly, and in ways that serve beneficiaries' long-term interests.

Coordination, field building, and engagement on topics that include politically contested issues can expose systems-level investors to legal risk. While fiduciary duty, anti-trust, acting-in-concert rules etc. represent important guardrails, investors may be concerned that new initiatives could become targets for litigation.

Institutions have different appetites for legal uncertainty. Some are willing to innovate, some to the point of testing boundaries and creating precedents; others avoid strategies that could expose them to challenge, even when the legal basis for concern is weak.

This can create a collective action problem. Systems-level investing often requires collaboration (initiatives gain influence when they are backed by a large weight of assets under management) but legal uncertainty can discourage innovation and momentum building precisely when it is most needed. Progress may depend as much on clarifying what investors are permitted to do (for example) as on convincing them what they should do. 

At its core, systems-level investing requires asset owners to rethink their role. Rather than acting solely as passive allocators of capital, they are encouraged to see themselves as stewards of the systems on which long-term portfolio returns depend.

Traditional finance often treats markets as external realities to which investors must adapt. Systems-level investing flips this perspective. Markets are not natural phenomena but social systems shaped by laws, institutions, norms, and the decisions of market participants. Investors are therefore not merely participants in markets; they are among the actors that shape them.

This shift could have profound implications. If investors influence the systems that determine portfolio outcomes, then stewardship cannot be confined to individual assets. Fiduciary responsibility expands to include the long-term health of the economic, social, and ecological systems on which beneficiaries depend. So long as the investment time horizon is long enough, there is some hope that investors might ‘step up’ in their role as global stakeholders, with legitimate and fiduciary interests in fostering stable, sustainable, and flourishing societies.