TCR: A Paradigm Shift in Socially Responsible Investing

Frank Dixon
June 4, 2017
www.GlobalSystemChange.com

A new approach to socially responsible investing (SRI) is needed to more effectively address rapidly declining environmental and social conditions. Over $20 trillion dollars are invested in the global SRI market. Impact investing and other types of SRI have driven substantial environmental and social benefits. Nearly all large companies have implemented sustainability strategies, due in large part to pressure from the SRI market. But in spite of this, environmental and social conditions are declining rapidly in many regions. SRI can be far more effective at halting, and then reversing this degradation.

The Total Corporate Responsibility (TCR^®) approach, developed in 2003, provides a paradigm shift in SRI by shifting the focus from company change to system change. The approach can be used to develop SRI funds that provide superior financial returns and drive far greater environmental and social benefits than any other type of SRI.

A much greater focus on system change is essential in the SRI area. Environmental, social and governance (ESG) rating and SRI are almost completely focused on unilateral corporate efforts to reduce negative environmental and social impacts. These company-level changes include selling environmental and socially responsible products, taking better care of employees and reducing pollution. But flawed, reductionistic economic and political systems make it impossible to eliminate about 80 percent of negative impacts. Very generally speaking, companies can mitigate about 20 percent of long-term and short-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 voluntary impact mitigation, they will put themselves out of business.

Modern economic and political systems were developed from a reductionistic perspective that ignores much of reality. These systems unintentionally place businesses in conflict with society. They frequently compel companies to place financial returns ahead of the environment, customers, employees and other stakeholders. Flawed systems force all companies, without exception, to degrade the environment and society. System change represents about 80% of the sustainability solution. But it gets little attention compared to company change.

A companion series of books to TCR called Global System Change extensively describes hundreds of sector-level and overarching system-level changes needed to achieve sustainability and real prosperity. TCR defines two broad levels of system change – mid-level and high-level. Mid-level system change involves systemic changes at the sector, stakeholder or environmental/social issue level. High-level system change involves evolving overarching economic, political and social systems into sustainable forms. The TCR model analyzes and rates companies on traditional ESG metrics and mid-level and high-level system change efforts. TCR and Global System Change provide a system change roadmap for the corporate and financial sectors.

ESG ratings rank companies on sustainability performance. As capital markets used this research to develop SRI funds, companies were compelled to improve environmental and social performance. TCR expands the definition of superior sustainability performance to include mid-level and high-level system change. Using system change-focused corporate sustainability ratings to develop SRI products will compel companies to proactively work for system change, in the same way that ESG ratings compelled them to improve environmental and social performance.

The business case for system change is strong and clear. As noted, flawed systems compel companies to degrade the environment and society. As the human economy expands in the finite Earth system, these negative impacts return more quickly to harm companies, often in the form of market rejection, lawsuits, difficulty siting facilities and inability to access new markets. Reducing negative impacts lowers this profit-inhibiting pushback from society, and thereby protects companies and investors. But again, only about 20 percent of negative impacts can be mitigated through unilateral corporate efforts. System change is required to eliminate the remainder.

Pulling out of the Paris Climate agreement and other forms of deregulation will make it more difficult for businesses to reduce negative impacts. Failing to hold companies fully responsible for negative environmental and social impacts is a major economic and political system flaw. This is the specific mechanism that places businesses in conflict with society. System changes that hold companies fully responsible make acting in a fully responsible manner (by eliminating all negative environmental and social impacts) the profit-maximizing strategy.

The TCR model can be used to analyze and rate all types of companies on traditional ESG metrics and system change performance. The ratings can be used to develop many types of SRI funds, including negative and positive screened, impact and index. TCR funds have the potential to drive far greater environmental and social benefits than any other type of SRI because they are focused on the most important sustainability issue – system change.

TCR funds also have the potential to provide superior financial returns. TCR research identifies financially relevant sustainability risks and opportunities. They also provide excellent indicators of management quality, the primary determinate of superior financial and stock market performance. Mid-level and high-level system change are complex management challenges. Ability to handle them well strongly implies that management has the sophistication needed to deal with other business issues well, and thereby earn superior returns.

Through campaign finance, lobbying and other activities, businesses strongly influence government in the US and many other countries. Companies often lobby government to reduce regulations. This frequently increases short-term shareholder returns. But deregulation accelerates environmental and social degradation by failing to hold companies responsible for negative impacts. The current US administration is allowing companies to more severely degrade life support systems, labor and other aspects of society. This ultimately will hurt business. With government failing to act, stronger efforts are needed from the corporate and financial sectors.

TCR provides a practical and profitable way for companies and investors to protect themselves and society by promoting system change. Implementing the TCR approach in the corporate and financial sectors is fully described in the last book of the Global System Change series, called Global System Change: We the People Achieving True Democracy, Sustainable Economy and Total Corporate Responsibility.

Frank Dixon oversaw the sustainability analysis and rating of the world’s 2,000 largest companies for many years as the Managing Director of Research at Innovest Strategic Value Advisors, formerly the largest corporate sustainability research firm in the world. Institutional investors used Innovest research to develop high-performing socially responsible investing products. Extensive corporate sustainability experience made it clear that flawed systems compel all companies to degrade the environment and society. Frank Dixon developed the TCR^®approach to provide a practical and profitable way for companies and investors to engage in system change. Following Innovest, he provided sustainability and system change consulting to companies in the US and Europe. Most recently, he wrote the Global System Change series of books. Using a whole system approach, the books describe the major economic, political and social system changes needed to achieve sustainability and real prosperity.

Frank Dixon has an MBA from the Harvard Business School.