Moving towards a systems framework for investing

Thursday 27 August 2020

Marisa Hall, co-head of the Thinking Ahead Institute at Willis Towers Watson

Author: Maha Khan Phillips

Investors need to move towards a systems framework for investing which recognises and acknowledges that businesses and portfolios cannot be considered as independent from wider society or the environment, says Marisa Hall

PI: You’ve talked about the need for investors to move towards a systems framework for investing. What would such a framework look like?  Does it allow for asset managers to operate with more purpose than they would, otherwise?

Marisa Hall: Free market capitalism has been deemed as one of humanity's greatest inventions and the greatest source of prosperity the world has ever seen. At the same time, its single-minded pursuit of profit has led to widespread social and economic inequality and the looming threat of climate catastrophe. The shock of Covid-19 to the global economy should be seen as an opportunity for investment organisations to simultaneously confront these realities.

Investors need to move towards a systems framework for investing which recognises that our businesses and portfolios cannot be considered as independent from wider society or the environment. They will affect (and be affected by) both of them – for better or for worse. A systems-theory viewpoint starts with the idea that the returns we need can only come from a system that works and the benefits we pay are worth more in a world worth living in. This results in investment policies that directly incorporate ESG and foster the sustainability of investee companies and the system as a whole. In other words, we need to move beyond the shallow mapping of sustainability factors onto investment outcomes to more holistic and reflexive policies that focus on the intentionality of the investor to produce positive real-world outcomes and therefore sustainable investment results. This is what it means to be a purposeful investor.

PI: But how can a systems framework be applied to practical investment thinking?

Hall: The key is for investors to not only focus on how sustainability issues affect investment decisions but to also consider how investment decisions affect sustainability and real-world outcomes.

Moving towards a systems framework for investing not only means that stewardship of existing assets really matters, but it also means that our provision of new capital needs to be directed towards investments that support a sustainable future and achieve positive real world impacts. The crisis is another reminder that this reallocation of capital may be required sooner than we previously thought. It also reminds us that exclusions alone are not enough. Most sustainable investing funds either exclude firms operating in harmful industries or focus on companies that have in the past performed well on ESG performance metrics. This means that the majority of the 30 billion dollars deployed in sustainability investing today is invested in ways that promise only modest and perhaps even negligible investor impact. Companies can and do change over time and investors can help trigger or accelerate that change.   

PI: Will this be a significant paradigm shift for investors? How can we move the discussion beyond the abstract?

Hall: Large asset owners have a unique role to play in influencing systemic issues. Universal owners are very large, long-term, leadership-minded organisations which, because of their size, hold a slice of the whole economy and market through their portfolios. These asset owners are exposed to global challenges and opportunities to influence outcomes lie in integrated management of the market exposure of the investment return. Universal owners provide a natural base of investors who can understand and manage systemic risk through their investment strategy. But they are also well placed to play a more influential role in safeguarding the financial system and contributing positively to big societal issues. In other words, they can 'do well while doing good'. These asset owners are deliberate in aiming for impact (‘intentionality’) through their ability to produce positive system effects (‘additionality’).

Smaller asset owners can also influence the system by selectively employing universal ownership strategies within their portfolios. Often these funds are motivated by mission, values and beliefs considerations and need to exhibit the intentionality to influence and impact the system. This can be done through collaboration with other larger asset pools or through delegating. If the latter, they need to be confident that performance metrics also address systemic issues. This can be achieved in part by asset owners shifting focus to principles-based evaluations of agents instead of the current verify and analyse model. This starts with an evaluation of whether principles and beliefs (i) are clear, meaningful and actionable, (ii) are actually being followed (intentionality) and (iii) lead to the desired results (additionality).

PI: Entities within the framework, as it is described, are simultaneously co-operating and competing with each other, using technology and complex adaptive systems. As the system evolves, will there be implications for how players in the industry work with one another?

Hall: At the Thinking Ahead Institute, we often talk about the 4-3-2-1 PIN code for a more sustainable economy. The PIN code attributes the 10 available units of influence, as follows: four to public policy, three to corporations, two to the investment industry and one to the individual citizen.  This is an impact framework which recognises that all participants need to exert influence and work with each other to drive positive change. It is a reminder of the shared responsibility to unlock impact that society is asking for and critically needs.

We are currently seeing an ideological shift that supports a fresh direction of travel. Organisations are becoming more focused on purpose – seeing profits as supporting a purpose which seeks to create value for stakeholders via society and the planet. This is linked to enlightened self-interest which acknowledges that social, environmental and financial issues are globalised and interdependent and disruptions to these create systemic risks for capital markets and investors. As such, organisations can benefit from collaborating with peers and influencing public policy to achieve their goals.  

PI: So does a systems framework provide innovative thinking around issues like ESG and diversity?

Hall: Systems theory tells us that what matters is governed by the multiple subtle ways that things work and connect (everything connects and behaviours matter). If we get it right the financial system can lay the foundations for wealth and well-being to be more fairly and resiliently distributed. Organisations that have a strong purpose-driven culture linked to the health of our ecosystem are naturally aligned to provide innovative thinking around issues such as ESG and diversity as they recognise how these issues are interlinked to business success. The ‘S’ of ESG, in particular, has become more of a focus for investors as a result of the pandemic and recent issues highlighting social and racial injustice following the killing of George Floyd. The responses that were communicated on racial injustice, in particular, from many organisations in our industry and outside, have been consistently pitched and placed an extremely high value on diversity and inclusion, and openness. It will be a big test of the strength of culture at these organisations whether the words will be followed by just and fair deeds.


Marisa Hall, co-head of the Thinking Ahead Institute at Willis Towers Watson

Marisa Hall, Co-Head of the Thinking Ahead Institute at Willis Towers Watson







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