System Change Investing – A Whole System Approach
August 1, 2019
System Change Investing (SCI) can strongly drive system change, in the same way that Sustainable/Responsible Investing (SRI) successfully drove corporate sustainability over the past 20 years. The whole system approach involves rating companies on system change performance and developing high-performing SCI funds. SCI represents the most significant SRI transformation since positive screening was introduced in the 1990s.
SCI provides substantial sustainability, financial and leadership opportunities. The approach can provide far greater sustainability benefits than any other type of SRI. This enables it to capture a large share of the $23 trillion global SRI market. SCI ratings identify systemic risks and opportunities and provide strong indicators of management quality and stock market potential. They can be used as overlays to enhance the financial performance of value, growth, index and many other types of investment funds.
System change is the most important sustainability issue. Financial institutions launching SCI funds will be seen as the true sustainability leaders. This article summarizes two key financial sector questions – Why is system change important and How can it be effectively achieved?
Why is system change important?
Einstein said that we cannot solve major problems from the level of thinking that created them. Modern economic and political systems were developed from a narrow, reductionistic perspective that ignores many relevant factors. As a result, the systems produce unintended consequences, such as widespread environmental and social degradation. They unintentionally put business in conflict with society and humanity in conflict with nature. Modern systems make it impossible for any company to act in a fully responsible manner (by eliminating all negative impacts) and remain in business.
Very generally speaking, companies can voluntarily eliminate 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, costs usually increase. If companies continue reducing impacts, they will put themselves out of business long before reaching full impact mitigation. Under modern systems, voluntary corporate responsibility ultimately equals voluntary corporate suicide. This largely is a system problem, not a company problem.
Flawed economic and political systems compel all companies to degrade the environment and society. These systems, and the reductionistic thinking that created them, are the root causes of the major environmental, social and economic problems addressed by the UN Sustainable Development Goals (SDGs).
Nearly all SDG and other sustainability efforts are focused on symptoms instead of root causes. They strive to address problems, instead of the flawed systems that created them. These approaches produce many benefits, and therefore should be greatly expanded. But they will not get us close to sustainability or SDG achievement. Focusing on symptoms instead of root causes is like trying to put out a fire while simultaneously throwing gasoline on it. Parallel, complementary system change efforts are needed to achieve the SDGs and sustainability.
Experts have been promoting economic reform and other types of system change for decades. Like sustainability, these approaches provided many benefits. But environmental, social and economic conditions are declining in many regions. Economic and political systems often are becoming more destructive. Past system change approaches frequently had limited results because they were theoretical, reductionistic, process-focused and/or implemented ineffectively.
Academia developed complex systems theories that often were difficult for average citizens to understand. System change efforts frequently focused on specific issues, such as economic reform, and did not adequately address all relevant, interconnected aspects of the whole system (i.e. reductionism). They also often focused on system change process, rather than content. They emphasized the collaborative processes needed to achieve system change, without adequately addressing system change content, such as inviolate natural laws and the essential system changes needed to align human society with them. System change implementation frequently did not practically address key system change leverage points. This limited effectiveness.
Complexity probably has been the main barrier to system change. Improving overarching economic and political systems can seem mind-numbingly complex. Whole system approaches help to overcome the complexity barrier and limitations of earlier system change efforts.
Modern society reflects modern thinking. Virtually all major challenges facing humanity result from reductionistic thinking and the inevitably flawed systems that result from it. As Einstein implied, we must think at higher level to solve our most complex challenges. That higher level is whole system thinking. It facilitates comprehension of current systems by providing broader time and space perspectives.
A historical perspective shows that all human systems which violate the laws of nature change, usually by collapsing. Modern systems grossly violate the physical and nonphysical laws of nature, including equality, fairness and self-government. They are destroying life support systems and causing massive, unnecessary suffering among humanity. They have pushed us near or beyond many environmental and social tipping points. They inevitably will change, probably soon given the vast degradation they are causing.
A broader space perspective shows the irrational, unintentionally destructive nature of modern systems. To illustrate, businesses often are seen as independent entities that should focus mainly on maximizing their financial well-being. A whole system perspective shows that companies are not separate from larger environmental and social systems. It is irrational, and ultimately suicidal, to consider the well-being of companies apart from the larger systems that sustain them.
People in the future will look back on current systems the way we look back on slavery. In the southern US 200 years ago, many people would have had difficulty imagining an economy and society without slavery. A broader perspective shows that system change was inevitable due to the horrible, evil, natural law-violating nature of slavery. In the same way, it is difficult for many people today to imagine different economic and political systems because their lives depend on current ones and they were taught that modern systems are the best in human history.
A whole system perspective illuminates the massive, unintentionally destructive aspects of current systems. It shows that system change is inevitable. We either will voluntarily figure out how to evolve economic and political systems into sustainable forms. Or nature and reality will impose involuntary system change, probably in a highly traumatic manner.
The primary overarching system flaw in the business area is the failure to fully apply the rule of law to companies. This principle says the businesses should be free to do what they want, provided that they do not harm others. Current systems not only allow, but compel companies to cause massive environmental and social harm. They grossly violate the rule of law by failing to hold companies responsible for negative impacts.
Many specific economic and political systems flaws compel irresponsible behavior by not holding companies fully responsible. These include externalities, limited liability, time value of money, over-emphasizing economic growth and shareholder returns, inadequate measurement of social well-being, and inappropriate business influence of government.
A whole system perspective also illuminates the business case for system change. Flawed systems compel companies to degrade the environment and society. As the human economy and population expand in the finite Earth system, negative corporate impacts return more quickly to harm companies, often in the form of market rejection, lawsuits and reputation damage.
Companies have increasingly strong financial incentives to reduce negative environmental and social impacts. But they only can unilaterally eliminate about 20 percent of them. System change is essential for mitigating the vast majority of negative impacts.
Current systems compel companies to profit by degrading the environmental and social systems needed for human survival and prosperity. Sophisticated companies and leaders understand that this situation is increasingly untenable. They realize the critical need for collaborative system change. Effective system change eliminates conflicts between business and society, and thereby makes acting responsibly the profit-maximizing strategy. System change is essential for protecting business and society and achieving the SDGs.
A whole system perspective shows critical system change leverage points. These include government, public and corporate/financial. Governments that are heavily controlled by vested interests, such as in the US, are unlikely to change on their own. The people collectively are the most powerful force in society. They could quickly change any government or company, if they understood and acted upon their many common interests. Uniting and empowering citizens is a longer-term issue.
Engaging the corporate and financial sectors is the most powerful short-term system change strategy. These sectors already strongly influence government. They often are major barriers to system change. Companies and investors frequently resist changing systems that provide large, short-term financial benefits. SCI converts this barrier to a strong driver of system change.
We do not need to understand all aspects of system change before beginning. Companies did not fully understand corporate sustainability when they began implementing sustainability strategies 20 years ago. They learned as they went along and implemented increasingly sophisticated approaches. The same will occur with system change.
From a business perspective, the key issue is sending the system change signal from the capital markets to companies. As investors shift investments based on corporate system change performance, companies will implement increasingly sophisticated collaborative system change strategies.
How can system change be achieved?
SCI is one component of a whole system approach to sustainability. It is a general term, like SRI. There are many ways to rate corporate system change performance. Simple SCI models could be developed based on existing ESG metrics that are related to system change, such as campaign finance, lobbying and media campaigns. More sophisticated SCI models could have a sector or regional focus. Ultimately, whole system SCI approaches are required. This is the only way to achieve the pace and scale of change needed to avoid involuntary system change (collapse).
Reductionistic system change approaches often do not adequately address critical factors that lie outside their focus area, such as root causes, systemic barriers, key leverage points and optimal solutions. Whole system approaches are based on reality. They take all relevant factors into account. They practically apply whole system thinking to the highest level whole system over which humans have influence (i.e. the whole Earth system and near space environment), and make this information comprehensible for non-expert citizens and leaders. The book Global System Change: A Whole System Approach to Achieving Sustainability and Real Prosperity does this. It uses whole system thinking to provide practical, systemic solutions for all major issues and areas of society.
This type of research is essential for effective system change rating. SCI is more complex than traditional ESG research. The rating context or framework is much larger. Traditional ESG research mainly is focused on unilateral corporate efforts to reduce negative impacts, for example, by reducing pollution and selling low-impact products. The context for SCI rating ultimately is the whole Earth system and its sub-element human society.
Current system change approaches largely are process-focused. System change, especially at higher levels, requires collaboration. Highly effective collaborative processes have been developed that produce beneficial results at the company, community and sector levels. But these areas are severely constrained by overarching economic and political systems. Effective system change balances process and content (i.e. systemic constraints and specific systemic changes and societal actions needed to abide by them).
To illustrate system change content, the most important aspects of sustainable society are objective and beyond debate (within the realm of logic). Human activities occur within the larger whole Earth system. Nature does not care what humans think, say or do. Over time, humanity absolutely will abide by the physical and non-physical laws of nature. This is a non-debatable fact of reality. Many systemic changes are needed to achieve sustainability. Debate could occur about how to implement them. But at a high level, these changes usually are beyond rational debate.
For example, through the time value of money system flaw, modern systems violate the laws of nature by implying that future generations are worth less than current ones. Sustainable human systems would not under-value future generations. Time value of money obviously must be changed.
Broad societal actions are needed to achieve sustainability. Managing or influencing the collective action of 100 million people is far more complex than effectively managing a collaborative 100-person group. Understanding inviolate constraints, necessary system changes and essential societal actions is critical for effective higher-level system change. This content informs and helps to organize effective system change processes, for example, by indicating the optimal structure and focus of collaborative groups. Understanding system change content enables these groups to operate in ways that ultimately drive broad societal changes.
Process and content support each other. Process usually starts at the micro-level, while effective content starts at the macro-level. Successful system change often would initially be driven by a small group of highly motivated, effectively organized people and organizations (process). Clear overarching system change content helps collaborative groups to efficiently achieve their goals. It clarifies all relevant factors and thereby maximizes the likelihood of success. It improves efficiency by avoiding reinventing the wheel. Attempting to clarify essential system change content at a whole system level could bog down collaborative groups. Integrating experts who already understand this content can greatly accelerate collaborative results.
To summarize process and content, voluntary system change probably would not occur without an effective collaborative process for managing it. Successful high-level system change probably would not result without a clear, whole system understanding of system change content and context.
Regarding SCI, the whole system context must be understood before corporate system change performance can be effectively rated. Understanding systemic constraints and necessary system changes and societal actions is the first step. Once this is clear, at least at a general level, the optimal corporate role in driving these changes and actions can be defined and rated.
ESG research is used to produce SRI funds. The research needed to produce SCI funds could be called ESS (environmental, social, systemic). Systemic refers to all system levels, including individual, company (which includes governance), sector and overarching systems.
The first SCI model, Total Corporate Responsibility (TCR®), was developed in 2003. TCR expands the definition of corporate sustainability to include system change performance. The model is segregated into three broad metric categories – traditional ESG, mid-level (sector-level) system change, and high-level (economic, political, social-level) system change. Sample TCR metrics include system change strategy, public awareness and media campaigns, system change collaboration, government influence activities, addressing specific system flaws, and supporting NGOs, academia and other groups promoting system change.
System change and SDG-related investments usually focus on specific issues or areas, such as clean water and renewable energy. TCR uses a best-in-class rating approach that can be applied to nearly any investment fund type. This enables a much larger percentage of SRI assets to be engaged in driving system change.
SCI is a true new paradigm approach to SRI. It shifts the focus from company change and symptoms to system change and root causes. This focus on the most important sustainability issue enables SCI funds to provide substantially greater sustainability benefits than symptom-focused SRI (i.e. essentially all current SRI approaches and funds).
SCI ratings can enhance financial performance by identifying systemic risks and opportunities that are not addressed by traditional financial analysis and providing strong indicators of management quality and stock market potential. Collaborative system change is the most complex management challenge. System change leadership strongly indicates sophisticated management that will earn superior financial returns.
ESS/SCI is more complex than ESG/SRI. Extensive ESG, SRI and whole system change experience and knowledge are needed to successfully launch SCI funds. The developer of SCI (Frank Dixon) was the head of research for the largest ESG research company (Innovest). He developed most of their ESG models and research procedures. He used this expertise to develop the first corporate system change rating model. He also conducted extensive, multidisciplinary whole system change research. As result, he has the experience needed to market, develop, launch and manage successful SCI funds. His company Global System Change is working with Connecticut-based Conscious Capital Wealth Management to launch SCI.
A growing number of leaders and experts are discussing the importance of system change. SCI provides the most powerful and effective short-term strategy for driving it. The approach provides superior financial returns and the highest possible sustainability benefits. Companies launching SCI funds will be seen as pioneers of the most important sustainability strategy in the 21st century – system change.
This article briefly discusses many complex system change issues. It is only the tip of the system change iceberg. Far more whole system change information is available in the Global System Change books and articles on the Global System Change website.
Frank Dixon established Global System Change in 2005 when he recognized that system change would become the dominant sustainability issue of the 21st Century. His experience as the Managing Director of Research for the largest ESG research company (Innovest) and sustainability advisor to Walmart and other organizations showed that flawed economic and political systems compel all companies to degrade the environment and society. He conducted several years of multidisciplinary research to produce a true whole system approach to sustainability (described in the Global System Change books). The approach provides practical system change strategies for all major areas of society. In the corporate and financial sectors, System Change Investing represents the most advanced and effective sustainability strategy. Frank Dixon advises businesses, investors and governments on sustainability and system change. He has presented at many corporate and financial sector conferences around the world, as well as leading universities, including Harvard, Yale, Stanford, MIT and Cambridge. Frank Dixon is an Associate Fellow of the World Academy of Art and Science. He has an MBA from the Harvard Business School.
Copyright © 2019 Frank Dixon