System Change Investing
Resolving Systemic Investment Risks with ‘Hold Fully Responsible’ System Change
Frank Dixon
Global System Change
fdixon@SystemChangeInvesting.com
Current economic and political systems make it more profitable for companies to cause environmental and social problems, than to solve or not cause them. Climate change, high healthcare costs from unhealthy foods, social media addiction, and many other system-caused problems destabilize the economic and financial systems. They create substantial investment risks over the longer-term, and increasingly short-term.
Pensions and other investors cannot diversify away from system-wide investment risks. They are highly vulnerable, even if they are not invested in the companies causing the most environmental and social problems. Current systems are the root causes of climate change and other major challenges. The systems themselves are the main risks. The only way to fully mitigate systemic investment risk is to improve the systems that cause it. That is the purpose of SCI.
System Change Investing (SCI). Through SCI, investors use investing to drive system change. It provides a powerful strategy for resolving systemic investment risks and protecting returns. SCI was developed by a pioneer of return-enhancing responsible investing and creator of the concept of using investing to drive system change.
The approach expands corporate sustainability analysis to include system change and shifts investments to system change/sustainability leaders. These visionary companies are better managed overall. Shifting investments to them lowers risk and increases return potential. At the system-level, SCI powerfully incentivizes companies to improve systems.
Fiduciary Responsibility. Fiduciaries have an obligation to consider financially material issues. The health and resilience of the economic and financial systems are highly financially relevant, especially for longer-term investors. Fiduciaries should consider how their investments impact the environment and society, because they are the foundation of the economy. They also should consider how they can protect and stabilize the economy, because it is the foundation of investment returns.
Organizations cannot improve overarching systems on their own. Therefore, collaboration is essential. However, pensions and other institutional investors are in a uniquely powerful position to drive system change. SCI gives them the power to directly incentivize their invested companies to work for system change. It potentially is the single most powerful short-term system change lever available to humanity.
SCI enables pension funds, family offices, and the broader financial community to profitably use nearly their entire portfolios to drive essential systemic changes in all areas of society. It is likely to become a dominant form of responsible investing in the 21stCentury.
The Big Picture – HFR System Change versus Everything Else
Business and society are facing unprecedented, rapidly growing environmental, social, economic, and political problems. Flawed systems unintentionally compel companies to harm the environment and society, largely by not holding them fully responsible. This makes it impossible to fully stop harm in competitive markets. If companies try, without exception, costs go up and they go out of business.
By compelling harm, economic, political and financial systems have built in self-destruct mechanisms. They will take investors, companies, and broader society down with them, if they are not changed soon. Investors have the strongest possible incentive to promote the health and resilience of economic and financial systems. SCI provides investors with a powerful strategy for driving the transformation from systems that compel harm to those that compel no harm. This eliminates the foundational systemic investment risk and protects long-term returns.
A big picture, whole system view shows why the responsible investing, corporate sustainability, and the broader sustainability movement have not come close to resolving climate change and other major environmental and social challenges over the past 30 years. They do not adequately address root causes.
HFR System Change. Nearly the entire sustainability field exists because economic and political systems do not hold companies fully responsible for harm. Many system flaws do this, such as externalities, time value of money, and limited liability. These and other system flaws related to the corporate and financial sectors have the common characteristic of not holding companies fully responsible for harm. This is the general mechanism that makes it impossible for companies to fully stop harm and remain in business. It is the foundational root cause. Hold fully responsible (HFR) is the meta system change solution.
As shown over the past 20 plus years, all the actions in the sustainability field combined cannot achieve sustainability. If we eliminated all of them and replaced them with one meta effort (HFR system change), virtually all environmental and social challenges would be resolved.
Much of the sustainability movement is voluntary. It exists because current systems often make unsustainability more profitable than sustainability. Under HFR systems, most voluntary sustainability efforts would no longer be needed. Companies would automatically do them because they would be the profit-maximizing approaches. HFR system change aligns profits with social well-being. As companies provide more environmental and social benefits, profits increase. Regeneration is automatic under HFR economic and political systems.
Purpose-Driven Organizations (PDOs). Many companies are seeking to become PDOs by expanding their purpose to include broadly benefiting society. This implies not harming the environment and society. But that is impossible under current systems. As a result, no company can become a full PDO.
Companies decide the focus of their business. But it is not their job to voluntarily decide their societal purpose or determine how much they will or will not harm society. Under democracy, citizens decide corporate purpose. They would say that the purpose of business is to benefit society and cause no harm. Then they would require their servant government to enforce this purpose by holding companies fully responsible for harm.
Under HFR systems, companies could maintain a focus on maximizing profits and investment returns (because HFR aligns benefiting shareholders with benefiting society). If they substantially harm the environment and society, they cease to exist (as opposed to current systems where they cease to exist if they stop harming the environment and society).
The point here is not to suggest eliminating current sustainability efforts and replacing them with HFR system change. It is to illuminate the essential need for HFR system change and the impossibility of achieving sustainability (and thereby protecting investors, business, and society) without it.
Current sustainability approaches provide huge benefits to society. The world would be far worse without them. These approaches developed essential environmental and social solutions. But they cannot achieve sustainability under systems that demand unsustainability. Once HFR systems are implemented, sustainability can be achieved much more quickly because the solutions largely already exist. HFR system change supports and greatly accelerates current sustainability efforts.
It’s 1857, Again
The destructive nature of our flawed systems often is not apparent, because we’ve lived our entire lives under them. They can seem normal, as slavery seemed normal to slave owners in the southern US long ago. In 1857, slave owners were four years away from severe systemic collapse that would cause many of them to lose everything, including their lives.
We almost certainly are in the same situation again. Flawed systems force companies to degrade the environmental and social systems that enable the economy and business to exist. It is guaranteed that these systems will end or change. But the means of change are uncertain.
Rapidly growing problems and turmoil strongly indicate that our destructive systems are on the verge of substantial change. Will we respond as slave owners did in 1857, believing that systems can remain the same, and thereby suffer the same fate? Or will we voluntarily change our systems before they involuntarily change themselves through collapse?
System collapse today would be far more widespread than in 1857, because unintentionally destructive systems exist in all countries, human society is larger and more interconnected than ever before, and we are near or beyond many environmental and social tipping points.
Global System Change Framework
It will be impossible to halt rapid environmental and social degradation under the systems that caused it in the first place. Improving these systems is the most important action needed to protect business and society. That is a main goal of Global System Change (GSC). It uses the laws of nature and whole-system thinking to clarify sustainable society and the means to achieve it. This provides a framework for guiding and coordinating system change efforts.
The laws of nature have controlled all life on Earth for 3.8 billion years, and will continue to do so, regardless of what humans think, say, or do. Current human systems grossly violate these laws. That is why they are on the verge of collapsing. Aligning human systems and society with the laws of nature is essential for long-term survival and prosperity.
Complexity is a main barrier to system change. Evolving human systems and society into sustainable forms (i.e. system change) is the most complex challenge because nearly everything else is a sub-element of it. (Effectively dealing with this high level of complexity shows why system change performance is a strong indicator of superior management quality and stock market potential.)
Many argue that system change is too complex. Instead, we should focus on doing what is practically achievable now, and wait until business and society are ‘ready’ for system change. But current approaches won’t resolve challenges and prevent system collapse. Only HFR system change can do that. The corporate and financial sectors might not be ready (i.e. willing) to drive system change until systems collapse and the need becomes obvious. But then it might be too late.
Sustainability leaders and advisors have an obligation to raise awareness and provide practical solutions that drive timely bridge system change. GSC and SCI facilitate this by making system change easy to understand, practical, and profitable.
Bridge System Change. GSC distinguishes between bridge and transformation system change. Evolving systems and society into nature-compliant forms could take decades. But we probably only have limited time to avoid system collapse. Bridge system change involves making the HFR and other systemic changes needed to halt rapid environmental and social degradation. This will provide the time needed for a fuller transformation to sustainable society.
System change strategies often focus on different aspects of HFR, such as internalizing carbon and other externalized costs. Many different system change efforts are needed to achieve HFR systems and sustainable society. If each system change group develops their own system change goals and strategies, it can produce conflicting views of reality and counterproductive strategies.
GSC provides a nature-based, objective reality vision of sustainable society and high-level strategy for achieving it. This common vision and strategy can be used to guide and coordinate the many system change efforts needed to achieve timely bridge system change.
To illustrate, HFR is a key part of the GSC framework. Using HFR as a guiding, meta system change goal can coordinate the many efforts needed to hold companies fully responsible for harm, and thereby make acting in a fully responsible manner the profit-maximizing strategy.
System Change Investing
Current systems emphasize profits and investment returns. Asking companies and investors to accept lower profits and returns in exchange for environmental and social benefits is an uphill battle. Responsible investing became mainstream when it became return-enhancing. The transition from negative to positive screening produced this outcome. SCI uses the same proven, best-in-class approach to reduce investment risk and protect short-term and long-term investment returns.
Impact investing, ESG (Environmental, Social, Governance), and other forms of responsible investing provided many benefits. But they did not resolve major challenges because they were focused on changing companies (instead of the systems that control them) and addressing symptoms (e.g. climate change). SCI expands the focus to include changing systems and addressing root causes.
The failure of responsible investing to resolve challenges led to the development of system change-focused investment strategies. They often promote mapping systems, policy reform, and green/impact investing. Investments usually are focused on environmental and social solutions and restricted to the sustainable portion of the capital markets (e.g. sustainable sectors, technologies, products). But green investing won’t produce a green economy under systems that demand brown (i.e. unstainable/harmful).
SCI incentivizes all sectors to directly drive sector-level and high-level system change. Shifting economic, political and financial systems to ones that demand green (i.e. HFR systems) will greatly increase demand for green investments and technologies (because they will be the most profitable).
SCI models range from introductory to full whole-system approaches. The standard model combines traditional ESG with system change at the sector and overarching system levels. The most advanced models are based on the GSC framework. They rate companies on their efforts to promote the many systemic changes needed to achieve sustainable systems and society.
Under current systems, companies can only profitably mitigate about 20% of total negative environmental and social impacts. SCI enables full impact mitigation. The formula is ESG (20%) + system change (80%) = SCI (100%).
SCI models provide system change roadmaps for companies, enabling them to implement the most effective system change and sustainability strategies.
SCI Benefits
SCI provides many benefits to investors, companies, and society. These include:
- Long-term well-being. Advanced SCI models based on the GSC framework use the laws of nature to guide the evolution of human systems. Through SCI, investors drive the systemic changes needed to ensure the long-term well-being of business and society.
- Systemic risk reduction. The financial community is increasingly focusing on systemic risks, such as climate change and other environmental and social problems. But these are symptoms. The actual systemic risks are the flawed systems that create these problems. By effectively addressing the true systemic risks, SCI provides the first full investment risk mitigation strategy.
- Short-term returns. SCI enhances returns by providing a strong indicator of superior management quality and stock market potential. It also assesses systemic risks and opportunities that are not adequately addressed by conventional financial and ESG analysis.
- Long-term returns. Environmental and social degradation erodes long-term investment value. System change is the only way to reverse this degradation, and thereby protect long-term profits and returns. With SCI, investing is used to protect long-term investment returns.
- AUM/reputation. SCI enables full impact mitigation. It is the first responsible investing strategy with the potential to achieve the UN Sustainable Development Goals. This enhances asset manager reputation and attracts new investment.
- Ease of use. SCI is based on responsible investment strategies that asset owners and managers have been using for over 20 years. In its simplest form, SCI involves adding system change metrics to ESG models. These enhanced-ESG ratings are used in the same ways as current ratings. This makes SCI the easiest form of system change-focused investing to implement.
- Powerful. All companies (public and private) can be rated on system change performance. SCI ratings can be used as overlays on nearly all fund types to enhance financial and sustainability results. This enables nearly all of the capital markets to be used to drive system change.
- Leverage. The corporate and financial sectors have the greatest power to drive system change in the short-term. They are mainly controlled by investing. This potentially makes SCI the most powerful system change lever available to humanity.
- Efficiency. Investing in system change is highly efficient. Essentially all major environmental and social challenges have the same root cause (flawed systems). One root cause solution (HFR system change) can largely resolve all major challenges.
- Comprehensive. Whole-system SCI models drive essential systemic changes in all areas, including government, media, education, and finance. SCI enables investors to drive systemic changes throughout society.
- Track record. SCI uses the proven ESG track record. Over the past 25 years, ESG has incentivized nearly all large companies to implement sustainability strategies. Extensive research and results showed that it regularly enhanced investment returns. SCI uses the same proven approach to engage companies in system change and enhance returns.
- Full portfolio use. Pensions and other investors often invest a portion of their portfolios in ESG/green/impact investments. But to maintain diversity, most assets are invested in the brown economy. Through SCI, brown sector investments can produce greater sustainability benefits by directly driving system change. The approach enables investors to use nearly their entire portfolios to strongly promote sustainability and long-term asset protection.
The Future of Responsible Investing
HFR and other types of system change are highly complex. But incentivizing them can be easy. Directly driving system change is the long-term goal of SCI. However, the short-term goal is simply to incentivize it. Experts around the world have developed many system change solutions. SCI incentivizes the corporate and financial sectors to use their power and resources to implement these solutions.
Corporate and financial leaders have been prisoners of unsustainable systems that compel them to harm the environment and society. SCI transforms them into architects of sustainable systems who will be seen as heroes by posterity.
SCI plays by the rules of current systems, emphasizing investment risk reduction and return enhancement. This increases corporate and financial sector engagement, thereby maximizing the likelihood of achieving timely bridge system change. SCI uses investing to effectively address the true systemic risks, minimize the risk of system collapse, and protect the long-term well-being of business and society.
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More details about GSC and SCI, as well as several new system change concepts and strategies, are discussed in this paper: Global System Change and System Change Investing: New Whole-System Concepts and Strategies for Achieving Bridge System Change
For information about applying GSC and SCI through advisory services, contact fdixon@SystemChangeInvesting.com
Frank Dixon is a leader and pioneer of system change and return-enhancing responsible investing. As the head of research for the largest, #1-rated ESG research firm (Innovest, now MSCI), he developed and refined the original return-enhancing ESG models that manage trillions of dollars of assets. Overseeing the sustainability analysis of thousands of companies showed that flawed systems make it impossible for companies to stop harming the environment and society. Recognizing that system change was the key to sustainability, in 2003, he created the concept of using investing to drive system change and built the first models for implementing it. He has been evolving SCI models and developing system change solutions ever since. He launched the Global System Change and System Change Investing companies and wrote the Global System Change books. They provide systemic solutions for all major areas of society. His SCI and Total Corporate Responsibility (TCR®) approaches provide the most advanced responsible investing and corporate sustainability strategies. He advises leading organizations, including Investors for Purpose, Capgemini, Walmart, and the US EPA. Frank Dixon has presented at many conferences and universities, including Harvard, Yale, Stanford, MIT, and Cambridge. He holds an MBA from the Harvard Business School.
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