System Change Investing – The Next Generation of SRI

System Change Investing – The Next Generation of SRI

Frank Dixon
February 19, 2018

This paper proposes a new type of Sustainable/Responsible Investing (SRI) called System Change Investing (SCI). It is based on a new type of ESG research called ESGS (Environmental, Social, Governance, Systemic). The paper summarizes an ESGS research and SCI fund development approach call Total Corporate Responsibility (TCR®).

System Change Investing represents the most significant SRI transformation in 20 years. It has strong potential to capture a substantial share of the over $20 trillion global SRI market.

SCI, ESGS and TCR shift the focus of research and SRI fund development from company change to system change. Nearly all ESG research and SRI funds are focused on corporate efforts to reduce negative environmental and social impacts (i.e. company change). But 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 virtually all major environmental, social and economic challenges facing humanity. Companies cannot fully mitigate negative impacts and humanity overall cannot achieve sustainability and real prosperity unless these flawed systems are changed. System change is the most important sustainability issue. As this becomes clearer, SRI and ESG will evolve to SCI and ESGS.

What gets measured gets managed. Twenty years ago, many financial institutions began to measure corporate ESG performance and integrate it into investment decisions. This compelled nearly all large companies to implement sustainability strategies. In other words, when the financial community measured ESG performance, the corporate sector managed it. The same will occur with system change. As investors take corporate system change performance into account, companies will be compelled to address it.

The corporate and financial sectors are powerful. Engaging them in system change is one of the most important system change leverage points. TCR provides a practical and profitable way to do this. The methodology was developed by a leader in the ESG research field. It is based on ESG modeling and rating approaches that have a proven track record of providing superior financial returns. TCR can be used to develop SCI funds that provide excellent financial performance and far greater sustainability benefits than any other type of SRI.

This paper summarizes the system change opportunity, corporate system change analysis and rating, SCI fund development, and qualifications of the SCI, ESGS and TCR developer. Several summary articles about system change investing and TCR are available on This paper provides more detailed responses to two critical financial sector questions. Why should I care about system change? And what can I do about it?

System Change Opportunity

Over the past 20 years, sustainability has become mainstream in the corporate and financial sectors. Many companies are improving financial performance and competitive position by shifting product mixes to lower impact products, taking better care of employees, lowering pollution and reducing negative environmental and social impacts in other ways. The growing financial relevance of these impacts is a primary driver of SRI and corporate sustainability. As the human economy expands in the finite Earth system, negative impacts return more quickly to harm companies, often in the form of market rejection, lawsuits and reputation damage. Companies have strong financial incentives to reduce impacts. But flawed economic and political systems limit their ability to do so.

To illustrate, very generally speaking, companies can 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, costs usually go up. If companies continue down this path of voluntary corporate responsibility, they will put themselves out of business long before reaching full impact medication. Economic and political systems unintentionally put business in conflict with society, and thereby compel companies to degrade life support systems and society.

Many companies are making near record profits. But these returns often are based on huge, unpriced externalities (i.e. negative impacts). Profiting by degrading the environment and society is not sustainable. Rapidly expanding information transparency and social media make it far more difficult for companies to negatively impact the environment and society with impunity. To protect their brands, reputation and license to operate, companies must reduce negative impacts, even if it lowers profits in some cases.

System change is the only way to do this. Under current systems, companies only can remain in business by degrading the environment and society. Sustainable systems remove conflicts between business and society. Under these systems, companies only can remain in business by not harming life support systems and society.

Growing awareness that system change is essential for achieving sustainability is driving increased work in this area. Academia has been developing systems theories, systems dynamics, sustainable economics and other system change-related ideas for decades. Many NGOs and other organizations are promoting political and economic reform, for example, by emphasizing forms of capitalism that benefit all stakeholders. A growing number of companies are working on system change at the sector-level, for example, by collaborating with suppliers and NGOs to reduce negative impacts more than they could on their own.

The UN Sustainable Development Goals (SDGs) can be strong drivers of system change. The SDGs are one of the most important milestones in the history of the sustainability movement. They are widely embraced by nations, companies and NGOs. The SDGs facilitate system change by clarifying many aspects of sustainable society, such as ending poverty and hunger, protecting the environment, and promoting good education and healthcare, gender equality and sustainable economic development. Providing a big picture vision of sustainable society facilitates creativity and innovation. It enables corporate actions and system changes needed to resolve major problems to be deduced more effectively.

System change is the most important action needed to achieve the SDGs. Companies are severely constrained by flawed economic and political systems. In general, they probably only could reach about 20 percent SDG attainment under current systems.

System change is implied in the SDGs. Discussion of inclusive societies and institutions implies democracy and sustainable political systems. Discussion of sustainable infrastructure, production and economic growth implies sustainable economic systems.

As companies attempt to achieve the SDGs, some proactive businesses probably will promote specific, often sector-level system changes, such as incorporating carbon or other externalized costs into prices. These types of changes could be called mid-level system change. But evolution of overarching economic and political systems into sustainable forms probably is needed to achieve the SDGs. Overarching systemic changes, such as addressing externalities in general instead of specific externality types, could be called high-level system change.

It is unlikely that the SDGs will promote the scale and pace of system change needed to achieve the 2030 targets, unless high-level system change efforts are aggressively implemented. Current systems compel companies to focus primarily on maximizing shareholder returns. Unless they are specifically focused on addressing general economic and political system flaws, such as those noted below, they probably will not seek these broader types of system change.

A whole system approach probably is the only way to achieve successful high-level system change. The root cause of major environmental, social and economic problems is reductionism. Therefore, the foundational solution is whole system thinking and action. In reality, all major aspects of society are connected. The economic is not separate from the environmental, social, political or even psychological, spiritual and religious. But the human mind did not evolve to consider the whole Earth system, and its sub-element human society, at once.

As a result, we broke the system into parts and studied them without adequate reference to the whole system that contains them, a process known as reductionism. We developed economic and other theories and systems that ignore major aspects of reality, and thereby produce unintended consequences, such as widespread environmental and social degradation. These myopic (shortsighted) systems put business in conflict with society and humanity in conflict with nature.

Many groups have been working on economic and political reform for decades. But environmental and social conditions often are getting worse. These system change approaches sometimes have limited impacts because they are reductionistic. They might focus on specific aspects of system change, such as externalities or measurement of success, but not address other relevant factors. More advanced economic reform approaches advocate abiding by environmental laws and focus on maximizing the long-term well-being of humanity. But even these approaches sometimes do not adequately address relevant factors, such as media deception and public division and disempowerment. Whole system approaches take all relevant factors into account. They illuminate linkages between major aspects of society, root causes, systemic barriers, key leverage points and optimal solutions.

A whole system approach does not mean doing everything at once. Whole system change almost certainly would be implemented incrementally. But incremental actions would be guided by a whole system vision. Many past system change approaches could be called incremental reductionistic, meaning they do not adequately consider and incorporate all relevant factors. Whole system incremental approaches address these factors. As result, they have a much higher likelihood of achieving successful system change.

Academic and other leaders have developed systems theory and systems dynamics approaches that theoretically take all relevant factors into account. These approaches sometimes are applied to parts of society. The book Global System Change: A Whole System Approach to Achieving Sustainability and Real Prosperity takes this work to the next level. It goes beyond theory by applying whole system thinking to all aspects of society. A whole system vision is used to identify hundreds of practical economic, political and social system changes needed to achieve sustainability and real prosperity.

In the business area, Global System Change emphasizes the most important overarching system flaw – the failure to hold companies fully responsible for negative environmental and social impacts. This is the general mechanism that puts business in conflict with society and compels companies to degrade the environment and society. In competitive markets, businesses cannot voluntarily mitigate all negative impacts and remain in business. Holding companies fully responsible is essential for achieving full impact mitigation.

Failure to hold companies responsible violates a foundational principle of civilized society – the rule of law. This principle states that individuals and businesses should be free to do what they want, provided that they do not harm others. The principle usually is applied well to individuals. They are held responsible through murder, assault and many other laws. However, the rule of law is poorly applied to businesses in many countries. They are allowed to cause extensive negative environmental and social impacts (i.e. harm).

There are many economic and political system flaws that fail to hold companies responsible for negative impacts (i.e. fail to apply the rule of law). Examples relate to externalities, limited liability, time value of money, over-emphasizing economic growth and shareholder returns, failure to adequately measure social well-being, inappropriate government influence (through campaign finance, lobbying and job rotation between business and government), lack of democracy, lack of congressional and judicial term limits in the US, political parties, media deception, public division and disempowerment, corporate welfare, private sector money creation (i.e. fractional reserve lending), and myopic application of the concepts of economies of scale, free trade and competitive advantage (i.e. failure to use a whole system approach that accounts for all negative and positive impacts). General system flaws such as these are primary root causes of environmental, social and economic problems.

To illustrate how some of these flaws cause companies to degrade the environment and society, over-emphasizing shareholder returns compels companies to put shareholders ahead of all other stakeholders. Limited liability transfers extensive downside risk to taxpayers/government. High risk activities, such as burning fossil fuels and producing synthetic chemicals, often provide high financial returns. High financial risk frequently limits engagement in these activities. Transferring downside risk and liability to taxpayers/government creates attractive risk/return profiles for investors. Limited liability often compels companies to engage in the most risky actions. Holding companies and their owners fully responsible for negative impacts, as individual citizens and small business owners are, would compel companies to find safer ways to provide the products and services needed by society.

Time value of money is a foundation of many economic decisions. It essentially says that future generations and the environmental resources needed to keep them alive are worth far less than current citizens and resources. This often compels companies to harm future generations and degrade future life support systems. Protecting nearly worthless future people and resources would be a foolish economic decision, according to our myopic systems.

Only government can hold companies fully responsible, and thereby make acting responsibly the profit maximizing strategy. But politicians often cannot hold companies responsible when they are allowed to accept unlimited campaign contributions from businesses and their owners, take corporate jobs before and after political service, and hold extensive private meetings with corporate lobbyists.

Citizens collectively are the most powerful force in society. They could compel any government or business to change. Media deception often divides and disempowers citizens. This prevents them from exercising their collective power to compel government to hold companies responsible for environmental and social degradation.

Inappropriate government influence compels politicians to transfer massive amounts of public wealth to the top of society through many forms of corporate welfare, including externalities, limited liability, fractional reserve lending, unfair taxation, unfairly low wages and unfairly high prices. This is the primary cause of rising inequality around the world. It degrades society by making life unnecessarily difficult for low and middle-income citizens. Every other system flaw noted above, and many others discussed in Global System Change, compel companies to degrade the environment and society by not holding them fully responsible for negative impacts.

A whole system vision of sustainable society is needed for successful system change. Global System Change provides a whole system vision based on sustainable natural systems. The SDGs provide a partial vision. Some aspects of sustainable society are not fully addressed, perhaps to maximize national and corporate participation. For example, democracy, a global Bill of Rights, religious freedom, population stabilization and limits to growth are not specifically addressed. This might have limited participation from countries that suppress democracy, violate human rights, favor particular religions or have high projected population growth.

Making the goals voluntary and emphasizing sustainable economic growth, and high growth in the least developed countries, can increase corporate participation. It enables companies to address growing environmental and social concerns, while maintaining their systemically-mandated focus on maximizing shareholder returns. Even if the SDGs were not meant to provide a whole system vision of sustainable society, they can inspire innovations, such as using whole system change approaches to achieve the goals.

The optimal whole system vision for sustainable society is based on the sustainable natural systems all around and within us. The implied operating principles of nature can be used to develop sustainable human society and systems. These principles include seeking balance instead of growth, equitably distributing resources, producing zero waste, living on renewable resources, decentralizing production, equally valuing current and future generations, and enabling individuals to reach their fullest potential.

A whole system approach addresses the highest level whole system over which humans have influence, ultimately the whole Earth system. However, economic and political systems largely are established and managed at the national level. Therefore, initial whole system change efforts often ideally should be focused at this level.

A whole system approach also can accelerate SDG achievement by improving efficiency and effectiveness. Focusing governments, businesses and other organizations on the 17 SDGs and 169 targets in them could produce redundant or counterproductive strategies. The environmental, social and economic problems addressed by the SDGs have a common cause – reductionistic thinking and resulting flawed systems. Therefore, they have a common solution – using whole system thinking to evolve systems into sustainable forms.

Focusing business, government and broader society on high-level system change largely will resolve major problems with little issue-specific action. To illustrate, the root cause of climate change is not human-induced greenhouse gas emissions. It is the flawed economic and political systems that compel companies to emit these gases by not holding them responsible for emissions. Under sustainable economic and political systems, companies automatically would reduce emissions because this would be the profit-maximizing strategy.

The SDGs and broader sustainability movement mainly are focused on symptoms (environmental, social and economic problems), instead of root causes (flawed systems). ESG research, SRI and corporate sustainability strategies primarily seek to change companies, instead of the economic and political systems that strongly constrain and control corporate behavior. Not focusing on root causes limits effectiveness. Devoting at least some resources to improving flawed systems will improve the efficiency and effectiveness of SDG achievement.

The point here is not to suggest favoring whole system approaches over current corporate sustainability strategies and system change efforts. It is to do both. Current approaches provide large benefits, and therefore should be greatly expanded. But system change probably is over 80% of the sustainability solution. As a result, a much greater focus on mid-level and especially high-level system change is needed to achieve the SDGs and sustainable society.

System change represents a huge opportunity for the corporate and financial sectors. Several excellent NGO reports have been written about business opportunities related to the SDGs, climate change and other environmental and social issues. But companies’ ability to pursue these opportunities is severely constrained by current systems. System change will greatly expand and accelerate business opportunities related to sustainability by frequently making them the profit-maximizing strategies.

The largest system change opportunity occurs at the societal level. Current economic and political systems are rapidly degrading the environment and society. Every life support system is in rapid decline, with some regional exceptions. Wealth is being concentrated at the top of society, while billions of people struggle to survive. Current systems grossly violate the laws of nature. Throughout human history, all flawed systems changed, usually by collapsing. Vested interests that benefit from current systems often fight to maintain them. This resistance frequently causes system change or collapse to happen quickly, as occurred with the American and French revolutions, end of slavery in the US and fall of communism in the USSR.

Given the extensive environmental and social degradation they are causing, current systems almost certainly will change soon. System change is inevitable. Our only options are voluntary or involuntary change. Involuntary system change (i.e. collapse) would cause unprecedented disruption and suffering because human society is larger, more interconnected and closer to many environmental and social tipping points than ever before. Voluntary system change is by far our best option. Businesses and investors are much better off taking a seat at the system change table and helping to manage the process. Changing business and economic systems and structures might be disruptive. But it is nothing compared to the disruption that will occur if we fail to act.

Some people might say that past predictions of system collapse have been wrong, implying that current ones are too. But the present is not the past. We face unprecedented levels of stress, disruption and major problems in society. It is irrational and grossly irresponsible to assume that these problems can be solved with the same approaches that caused them in the first place, such as placing economic growth and shareholder returns before all other factors.

Others might say that technology will solve our problems. But technology will not save us if our foundational systems and operating principles remain unintentionally destructive. Instead, technology will be used to perpetuate current systems, as it has been for over 40 years.

Compared to humanity, nature displays nearly infinitely higher levels of coordination, technology, sophistication, sustainability and true prosperity. We are parts of nature. We have the ability to manifest the same high levels of sophistication, resilience and prosperity. We can be nearly infinitely better than we are now. This is the ultimate system change opportunity – reversing our rapid decline and manifesting our innate potential.

The financial community is increasingly focused on unmanaged systemic risks, such as those related to carbon emissions. But the largest systemic risks by far are the economic and political systems themselves. Flawed systems are the most important and financially relevant sustainability issue. They are the root cause of growing problems for business and society. This is why system change soon will become the central focus of ESG research, SRI and corporate sustainability strategies.

Corporate System Change Analysis and Rating

Capital market consideration of corporate system change performance is one of the highest system change leverage points. There are many ways to rate ESG and ESGS performance (conventional ESG plus system change performance). Lack of a common ESG model often causes variation in ratings. One reason for this is differing ESG rating goals. Up to the 1990s, the goal of ESG research largely was to assess corporate environmental and social performance.

In the mid-1990s, Innovest Strategic Value Advisors pioneered a new ESG rating approach. They argued that rigorous ESG ratings could be used as strong indicators of superior stock market potential. Environmental and social issues were becoming increasingly financially relevant. Therefore, taking them into account could lower financial risks and increase returns. In addition, sustainability is a complex management challenge. Leading sustainability performance strongly indicates superior management quality, the primary determinant of stock market performance. Innovest ratings had high correlations to stock prices. Many institutional investors around the world used them to develop high-performing SRI products. Innovest was sold to MSCI in 2010.

Evolving economic and political systems into sustainable forms is the most important action needed to achieve the SDGs and resolve the major challenges facing humanity. But this could take 20 or more years. The system change rating approach discussed here is intended to work in current systems. It seeks minimally disruptive system changes that protect business and society. In other words, the approach seeks evolution, not revolution. Like Innovest, TCR ratings identify financial risks and opportunities, and provide strong indicators of superior management quality and stock market potential.

Many people say that over-emphasizing shareholder returns is a major problem. It frequently compels companies to degrade the environment and society by placing shareholders ahead of employees, customers and all other stakeholders. They are correct. Over-emphasizing economic growth and shareholder returns is a major system flaw addressed by Global System Change and TCR.

Working within current systems means using the focus on shareholder returns to drive a minimally disruptive transition to systems that balance the needs of all stakeholders, reverse environmental and social degradation, and thereby protect businesses and investors. The vast majority of capital market investors seek superior, or at least reasonable, financial returns. Developing system change ratings that add alpha (i.e. enhance returns) will attract many investors. High capital market use of system change ratings will greatly accelerate corporate involvement in system change.

With this financial platform, there are many ways to rate corporate system change performance. Nearly 20 years ago, Innovest ESG models included some system change metrics, such as those related to campaign finance, lobbying and media campaigns. Simple system change models could be developed by using metrics such as these. But these approaches would have limited system change impacts because they are not based on a whole system vision of system change.

The most effective corporate system change analysis and rating models use whole system approaches (i.e. most effective in terms of maximizing corporate and system change benefits). Corporate system change actions only can be effectively assessed in a whole system context. System change must be understood at a societal level before the most effective corporate system change roles can be determined. Identifying essential system changes upfront establishes the context or framework for corporate system change analysis.

The same principles for developing effective ESG models apply to system change. Prior to selecting metrics, superior corporate sustainability performance should be defined. Aspects of this become metrics in rating models. The frame of reference for ESG rating mainly is negative corporate impacts. Understanding these impacts enables analysts to assess whether corporate sustainability efforts are effectively focused on the largest impact categories. For example, a company might be heavily promoting its low impact products. But if these represent less than one percent of sales and negative impacts, the approach could be considered greenwashing, unless the company plans to substantially shift their product mix in this direction.

Effective system change analysis is far more complex than ESG analysis because the scope is much larger. ESG research mainly focuses on corporate actions and impacts. But with system change research, companies cannot be considered in isolation, apart from larger systems that contain them. The frame of reference for effective system change analysis should be the whole system, system changes needed to achieve sustainability and real prosperity, and the corporate role in bringing about these changes. With this information, optimal or superior corporate system change performance can be defined. As with ESG models, aspects of this definition become metrics in system change rating models. Understanding the system change frame of reference enables analysts to assess whether corporate system change efforts are focused on the most important system changes.

Global System Change facilitates corporate system change analysis by providing a whole system vision of sustainable human society based on the sustainable systems all around us in nature. Through this vision, Global System Change describes essential system changes and the actions required from different segments of society to achieve them. A whole system vision often shows that companies ideally should be engaging in actions that fall outside the traditional corporate scope and dealing with nontraditional partners.

Selecting the system change analysis framework is one of the most important aspects of developing effective system change rating models. There are many ways to rate corporate system change performance. Metrics will vary based on the framework chosen. Once the framework is clear, metrics frequently become obvious.

TCR uses a particular whole system framework to assess corporate system change performance. Metrics are derived to support this system change strategy. The name Total Corporate Responsibility indicates the analysis/rating framework. TCR refers to companies acting in a fully responsible manner by eliminating all negative environmental and social impacts. System change is needed to eliminate about 80 percent of negative corporate impacts. As a result, TCR is primarily focused on system change.

The approach emphasizes the most important overarching system flaw in the economic and business areas – the failure of economic and political systems to hold companies fully responsible for negative environmental and social impacts. As discussed, this compels all companies to degrade the environment and society. Holding companies fully responsible is essential for achieving full impact mitigation (i.e. Total Corporate Responsibility).

Critical components of the TCR model include whole system principles, model structure, metrics, weighting, data and proxies. The TCR whole system vision is based on three principles – interconnectedness, actualization and posterity. Interconnectedness means that all aspects of the whole Earth/human society system are connected. From a corporate perspective, this means that companies see themselves as interconnected parts of larger systems, rather than independent operators. The well-being of businesses ultimately cannot be considered apart from the well-being of environmental, social and economic systems that sustain them. From this perspective, companies strive to eliminate all negative impacts because the impacts ultimately harm business.

Actualization means that the primary purpose of business is to help individuals and society reach their fullest potential (i.e. maximize the well-being of society). With this mindset, companies focus mainly on benefiting society. Reasonable profits and investor returns are earned by doing this efficiently and well. Posterity means that the primary obligation of this generation is to protect and ensure the well-being of future generations. From a business perspective, this means that companies strive to eliminate all impacts and actions that inhibit the ability of future generations to survive and prosper.

These principles help companies to see themselves as parts of larger systems (i.e. communities, countries, global society, the physical environment) and focus on maximizing the long-term well-being of these systems. The principles provide a general vision of sustainable business that is focused on benefiting all stakeholders. They comprise part of the standard against which businesses are rated.

Regarding model structure, TCR is broadly segmented into conventional ESG and two types of system change – mid-level and high-level. Mid-level system change refers to specific systemic changes, usually at the sector, stakeholder and environmental/social issue levels. High-level system change refers to general systemic changes that evolve overarching economic, political and social systems into sustainable forms.

System change often is complex and challenging. Companies rarely can achieve it on their own. Successful system change usually requires collaboration between organizations and various segments of society, such as business, government, academia and NGOs. As a result, collaborative system change actions are heavily weighted in the TCR model.

TCR metrics assess system change-related risks and opportunities and how well companies manage them. Many metrics are common to all sectors, while others vary based on sector-specific systemic issues. TCR metrics also assess system change relevance, focus and results. Relevance refers to assessing whether corporate system change actions are focused on the most important system changes. Focus involves determining if system change efforts are broadly or narrowly focused. System change strategies that are narrowly focused on one specific system change, for example, often have limited impacts because they usually do not adequately address relevant barriers, leverage points and other systemic factors. Broader system change strategies generally would be would receive higher ratings in TCR because they are more likely to succeed.

TCR contains several types of metrics, such as those related to specific and general economic and political system flaws, management systems, core strategy integration, disclosure, stakeholder engagement, and supporting and engaging in collaborative mid-level and high-level system change efforts. Mid-level system change activities could include collaborating in the supply chain, working with industry groups, seeking sector-specific regulatory reform and raising public awareness. High-level system change activities might include participating in collaborative system change efforts that seek to hold companies responsible for negative impacts, and thereby make acting responsibly the profit-maximizing strategy.

Metric weightings in the TCR model are based on factors such as relevance to system change and impact on financial and competitive performance. Regarding data, Ethical Markets and many other organizations provide information and data that could be used for corporate system change analysis, such as that related to campaign finance, lobbying, media campaigns, advertising and green economy actions and investments. When high quality data is not available for important metric categories, TCR uses logical proxies.

TCR is based on a best-in-class rating approach. Companies are compared to peers with similar system change risks, opportunities and management challenges. Experience with Innovest and other best-in-class approaches shows that this type of rating maximizes corporate engagement and promotes continuous sector-wide improvement. Leaders work hard to maintain their high ratings, while lower-rated companies often strive to improve performance.

The TCR rating model will evolve as corporate engagement in system change increases. A growing number of companies are involved in collaborative system change efforts at the sector-level. As result, mid-level system change metrics would be more stringent and require a higher level of proactivity and performance to achieve superior scores.

However, corporate engagement in high-level system change is limited. Therefore, the bar for achieving superior performance would be set lower initially. For example, with few companies discussing system change, businesses could set themselves above peers by publicly acknowledging the need to evolve economic and political systems into sustainable forms and supporting NGOs and other organizations that are working on this issue.

Initial TCR ratings would more heavily weight conventional ESG and mid-level system change performance. However, high-level system change is the most important sustainability issue. It is the only way to achieve the SDGs and resolve major environmental, social and economic challenges. As result, high-level system change weighing in the TCR model will increase as corporate engagement expands.

To illustrate how a company might be rated under TCR, Unilever is a long-term sustainability leader. The company has strong management commitment, extensive core strategy integration and proactive sustainability management and reporting systems. As a result, Unilever would receive high scores under the conventional ESG component of TCR. The company also is proactively involved in the Sustainable Food Lab and several other collaborative sector-level sustainability initiatives. As a result, it also would receive high mid-level system change scores.

Unilever is a strong supporter of the SDGs. Under its Sustainable Living Plan, the company seeks to address all of the goals. This SDG work could increase ESG, mid-level system change and high-level system change scores. Given its long-term sustainability leadership, Unilever is the type of company that would proactively engage in collaborative high-level system change as these efforts are established. Taken together, Unilever almost certainly would receive high TCR ratings.

TCR provides the compelling business case language needed to maximize corporate and financial sector engagement in system change. To illustrate, discussing the need to hold companies responsible by reducing limited liability might threaten companies and investors. To avoid this, TCR switches the emphasis to protecting business and society.

Advocates of the approach might explain how failing to hold companies fully responsible for negative impacts compels them to degrade the environment and society, which ultimately degrades business. The TCR approach suggests that companies engage in collaborative system change efforts that seek to hold businesses responsible, and thereby eliminate systemically-mandated conflicts between business and society. Collaborative groups might suggest reducing limited liability. But they also would propose a minimally disruptive way to implement the transition.

Twenty years ago, many companies did not understand the mechanics or benefits of corporate sustainability strategies. ESG models provided a sustainability roadmap. The models showed what specific actions are required to achieve superior ESG performance. Businesses frequently asked Innovest and other ESG experts how to improve performance.

The same situation exists today with system change. Many companies do not understand the mechanics, benefits or even need for system change. System change rating models will educate the corporate sector. By clearly defining leading mid-level and high-level system change performance, TCR provides companies with a practical system change roadmap.

TCR can be used by SRI asset managers, ESG researchers, institutional investors, foundations, NGOs and other groups that want to utilize or promote this most important form of SRI. The last ten percent of the whole system book noted above also is published as a separate book, called Global System Change: We the People Achieving True Democracy, Sustainable Economy and Total Corporate Responsibility. Chapter Eight of both books further discusses system change investing and TCR.

SCI Fund Development

TCR ratings can be used with traditional financial analysis to develop many types of system change-based investment funds, including positive and negative screened, index and hedge funds. Like Innovest best-in-class ESG ratings, TCR ratings can enhance investment returns by identifying financially relevant systemic risks and opportunities as well as providing a strong indicator of management quality. Collaborative system change is the most complex management challenge. Success in this area requires superior strategic vision, stakeholder engagement and many other skills. System change leadership strongly implies that companies have the ability to succeed in other business areas, and thereby earn superior returns.

Nearly all investors in the over $20 trillion SRI market seek high sustainability benefits. TCR funds can provide much greater environmental, social and economic benefits than any other type of SRI. System change is by far the most important sustainability issue, probably representing over 80 percent of the sustainability solution. But there are few, if any, SRI funds that are specifically focused on driving mid-level and high-level system change. SCI represents the newest and most important class of SRI. It is the only SRI approach that has the potential to achieve the SDGs and reverse environmental and social degradation.

TCR can be used to analyze and rate all business types and sizes. However, the approach usually provides the greatest sustainability benefits when applied to large cap companies. Smaller, sustainability-focused businesses, such as solar energy firms, have limited ability to change overarching systems.

Large cap companies often have strong influence over the political system, which largely controls the economic system. Large companies frequently use their political and economic influence to avoid being held responsible for negative impacts. Capital market influence through SCI funds will encourage companies to seek system changes that protect business and society by requiring companies to act more responsibly (i.e. abide by the rule of law). Developing large cap SCI funds represents one of the most effective ways to promote system change.

TCR funds are ideal for institutional investors with a longer-term focus, such as pension funds. Many of these institutions are taking a more systemic approach by focusing on the SDGs or specific issues such as water scarcity. But these approaches largely are focused on symptoms, not causes. Diluting investment focus across various issues limits positive impacts. It is far more efficient and effective to focus investments on root causes – flawed economic and political systems.

It is highly likely that TCR will enhance investor returns. Innovest used a similar approach quite effectively. However, in the early stages, before there is abundant evidence to show that system change investing adds value, asset managers can minimize risk by dialing down the system change/TCR weighting in investment decisions. Relying mostly on traditional financial analysis will minimize risk, while still providing strong sustainability benefits. The key issue with SCI is sending the system change signal to the corporate sector. Once companies know that their owners are taking system change performance into account, they will proactively engage in system change.

Qualifications of the SCI, ESGS and TCR Developer

After receiving an MBA from the Harvard Business School, Frank Dixon worked in the corporate and financial research areas. A desire to help address growing environmental, social and economic problems caused him to enter the sustainability field. From 1998 to 2006, he was the Managing Director of Research at Innovest Strategic Value Advisers. He developed most of Innovest’s ESG research methodologies. Responsibilities included developing or substantially upgrading environmental, social and issue-specific rating models, selecting metrics and model weightings, identifying data sources and proxies, writing scoring guidelines, developing corporate interview procedures, creating company and sector report templates, and hiring and training research analysts.

He managed up to 50 analysts and oversaw the sustainability research of the world’s 2,000 largest companies. From this perspective, he saw that flawed economic and political systems compel all companies to degrade the environment and society. Recognizing that system change was the most important sustainability issue, he used his ESG modeling expertise to develop the TCR corporate system change rating model in 2003. He gave over 100 presentations about sustainability and system change at universities and corporate and financial sector conferences. This led to sustainability consulting work with Walmart and other companies in the US and Europe.

After reviewing system change literature, he saw the need for practical, whole system change approaches. He wrote Global System Change to provide the research and methodologies needed for successful system change. The book starts by discussing whole system thinking, and then applies it to all major physical and nonphysical aspects of society. The emphasis is on describing the practical system changes needed to achieve sustainability and real prosperity.

Extensive expert research was used to produce the book. Tens of thousands of articles, books, reports, websites and other information sources were reviewed. Global System Change contains over 3,400 endnotes. Using a whole system approach, the book provides new insights and methodologies that often are not obvious to experts who only focus on one area. Many critical root causes, systemic barriers, leverage points and optimal solutions lie outside of issue-specific areas. A whole system approach is necessary to identify these key issues and develop effective systemic solutions.

This type of approach also is needed to effectively coordinate different segments of society and identify system change actions needed in each area. Global System Change provides this information. This paper discusses the financial sector role in whole system change. TCR also can be used to help companies implement the most advanced sustainability strategies.

Another critical action area discussed in Global System Change is empowering citizens to work together on their many common interests, such as protecting life support systems and future generations. As noted, citizens collectively are the most powerful force in society. They could change any business or government. However, when citizens are divided, for example into conservatives and liberals, they often lose their ability to protect themselves and their children.

Global System Change condenses about 100 books worth of information down to a volume that is the length of about six regular books. It explains the most complex issue (whole system change – integrating and addressing all major aspects of society) in simple terms and concepts that non-experts could easily understand. Global System Change enables citizens and leaders to get a relatively quick, whole system understanding of root causes and effective solutions to the major challenges facing humanity. The book illuminates many nontraditional corporate strategies that could greatly facilitate system change. For example, recognizing the importance of uniting citizens, companies might work with others to end the destructive, media-fomented civil war between conservatives and liberals.

In summary, Frank Dixon developed most of the research methodologies for one of the most successful ESG research firms, created the first corporate system change analysis and rating model, and wrote a comprehensive, whole system assessment of human society and the systemic changes needed to achieve sustainability and real prosperity. Sustainability expertise is needed to develop effective ESG rating models. The same is true with system change. Extensive whole system change research and ESG rating experience give Frank Dixon the technical, research and marketing expertise needed to develop and launch high-performing SCI funds that deliver greater sustainability benefits than any other type of SRI.

Refocusing financial and corporate sector sustainability efforts on the system changes needed to resolve major environmental, social and economic challenges is essential. It represents the most important SRI and corporate sustainability transformation in 20 years. The capital markets can greatly benefit society by taking corporate system change performance into account, and thereby encouraging companies to work for system change.

Copyright © 2018 Frank Dixon