System Change Investing – A New SRI Paradigm

System Change Investing – A New SRI Paradigm

Frank Dixon
July 19, 2018
Alliance for Research on Corporate Sustainability

System Change Investing (SCI) shifts the focus of ESG research and Sustainable/Responsible Investing (SRI) from company change to system change. It is the most significant SRI transformation in 20 years. SCI funds can provide superior financial returns, highest possible sustainability benefits and market leadership positioning. They have strong potential to capture a substantial share of the over $23 trillion global SRI market.

SRI, corporate sustainability and the broader sustainability movement largely are focused on company change and symptoms, instead of system change and root causes. The environmental, social and economic problems addressed by the UN Sustainable Development Goals (SDGs) are symptoms of flawed economic and political systems. These systems compel all companies to degrade the environment and society. They are the root causes of the major challenges facing humanity. System change is essential for resolving these problems.

Many companies are striving to achieve the SDGs. But flawed systems severely constrain their ability to do so. Very generally speaking, companies can voluntarily mitigate about 20 percent of short-term and long-term, tangible and intangible, negative environmental and social impacts in a profit-neutral or profit-enhancing manner. Beyond this point, rising mitigation costs often reduce profitability. If companies continue voluntary impact reduction, they will put themselves out of business long before reaching full impact mitigation. Our flawed economic and political systems unintentionally create a situation where companies must degrade the environment and society to survive. This largely is a system problem, not a company problem.

Overarching economic and political systems strongly constrain and control corporate behavior. These shortsighted systems make widespread environmental and social degradation the profit-maximizing corporate strategy. Improving them can make acting in a fully responsible manner the most profitable approach. System change probably represents at least 80 percent of the sustainability solution. But it gets relatively little attention compared to company change.

System change is complex. Many actions are needed to achieve it. Engaging the corporate and financial sectors is one of the most important system change leverage points. These sectors strongly influence economic and political systems, often in negative ways. Companies and investors frequently use campaign finance and lobbying to be held less responsible for negative impacts.

SRI funds can be used to drive positive system changes that make acting responsibly the profit-maximizing strategy. Over the past 20 years, growing financial community use of ESG research and SRI funds compelled nearly all large companies to implement sustainability strategies. SCI uses the same proven mechanism to engage the financial and corporate sectors in system change. The approach rates companies on system change performance and makes a strong business case for using these ratings to develop high performing investment funds.

ESGS Analysis

ESG research is used to produce SRI funds. The research needed to create SCI funds could be called ESGS (Environmental, Social, Governance, Systemic). Rating companies on system change performance is more complex than rating conventional ESG performance. The frame of reference is much broader. ESG research largely assesses corporate efforts to reduce negative impacts, for example, by lowering pollution and selling low-impact products.

The frame of reference for system change analysis ultimately is the whole Earth system and its sub-element human society. Since the 1990s, many ESG models contained some system-related metrics, such as lobbying, campaign finance and media campaigns. However, many additional factors must be assessed to accurately rate corporate system change performance.

The first SCI approach, Total Corporate Responsibility (TCR), was developed in 2003. The TCR rating model is segmented into three performance categories – conventional ESG, sector-level (mid-level) system change and overarching economic and political system-level (high-level) change. The model includes the rating principles, metrics, weightings, data sources and proxies needed to accurately analyze and rate corporate mid-level and high-level system change performance.

TCR is based on whole system thinking. Current system change efforts often have limited impacts because they narrowly focus on one issue, such as economic reform. Root causes, systemic barriers, key leverage points and optimal solutions frequently lie outside of issue-specific areas. TCR takes all relevant factors into account. The whole system book Global System Change: A Whole System Approach to Achieving Sustainability and Real Prosperity facilitates TCR and broader SCI analysis. It identifies important economic, political and social system changes, and the corporate and other actions needed to achieve them.

The name TCR refers to the most important overarching system flaw in the corporate area – the failure to hold companies fully responsible for negative impacts. This is the general mechanism that puts businesses in conflict with society, and thereby compels them to degrade the environment and society. Examples of high-level system flaws that fail to hold companies responsible relate to externalities, time value of money, limited liability, social well-being measurement, over-emphasizing economic growth and shareholder returns, and inappropriate business influence of government.

Not holding companies responsible (i.e. allowing them to cause harm) violates the Rule of Law. This principle says that companies and individuals should be free to do what they want, provided that they do not harm others. Allowing companies to degrade the environment and society increasingly hurts business. Negative impacts often return in the form of market rejection, lawsuits and reputation damage. Companies have strong financial incentives to help change the systems that compel them to cause negative impacts. TCR metric categories include specific system changes that hold companies more responsible, and the collaborative actions needed to implement them.

SCI Benefits

TCR can be used to develop SCI funds that provide superior financial and sustainability performance. The approach enhances financial returns by identifying financially relevant systemic risks and opportunities, as well as providing an excellent indicator of management quality, the primary determinant of stock market performance. TCR and SCI are focused on the most important sustainability issue – system change. As a result, they can provide far greater sustainability benefits than any other type of SRI.

System change can seem difficult and overwhelming. But current systems drive rapid environmental and social degradation. They inevitably will change through voluntary or involuntary means, probably soon given the vast degradation they are causing. Companies are better off helping to manage the system change process. Practical, incremental approaches can be used to minimize disruption and protect the long-term well-being of business and society.

Corporate profits are near record highs. But they largely are based on huge, unpriced externalities (negative impacts). Information transparency and social media are expanding rapidly. Businesses no longer can degrade the environment and society with impunity. To protect their brands, reputation and license to operate, companies must greatly reduce negative impacts. System change is the primary action needed to achieve this.

TCR and SCI models identify important system change actions, and thereby provide a system change roadmap for companies. TCR can be used to implement the most advanced corporate sustainability strategies. By shifting the focus from company change to system change, SCI and TCR provide a new paradigm in SRI and corporate sustainability.


A longer version of this article, called System Change Investing – The Next Generation of SRI, is available at It provides more detailed responses to two critical financial sector questions – Why should I care about system change? And what can I do about it?

Frank Dixon conducted several years of intensive research to produce a true whole system approach to sustainability (described in the Global System Change books). Practical system change strategies are provided for all major areas of society. In the financial and corporate sectors, SCI and TCR provide advanced, system change-based sustainability strategies. These approaches are based on extensive ESG and SRI experience gained as the Managing Director of Research for the largest ESG research company (Innovest). Frank Dixon has an MBA from the Harvard Business School.

Copyright © 2018 Frank Dixon