21st Century Investment: Re-directing financial strategies for system change. 2021. William Barkart and Steve Liedenberg, CFA. Barrett-Kohler Publishers, Inc.
Responsible Investment, Sustainable Investment, Impact Investment, Social Investment, Ethical Investment, ESG (Environmental, Social and Governance) Investment – There are plenty of labels for places that add investors to non-financial considerations in the traditional strategic management of risk and return. Now we can add one more word, “system-level investment,” the main theme 21st Century Investment: Re-directing financial strategies for system change. Authors, William Barkart and Steve Liedenberg, co-founders of the CFA, TIIP, Investment Integration Project.
The book identifies investors as conventional, sustainable or system level. “Systems” are classified as social, financial or environmental and include different regions such as consumer security (social), fair and honest market (financial) and climate stability (environmental). Conventional investors have been targeted to “increase returns in as short a time as possible.” Sustainable investors “seek ESG benefits with their financial returns”, but system-level investors go further by setting “clear goals for their impact on the system”.
Barkart and Leidenberg strongly argue that systemic problems have significant implications for future returns. For example, they cite a report from the Cambridge Center for Risk Studies which suggests that social instability associated with unemployment in the “millennium” could reduce the value of the U.S. equity portfolio by 23%. Problems such as water quality and climate change can affect investment outcomes or present a systemic risk. Investors should be careful.
The book sets out a roadmap for becoming a system-level investor in six specific steps:
- Use advanced techniques.
These steps are described in some detail, and examples of how best-in-class investors are currently implementing them are presented. Essentially, system-level investing is an evolution of responsible or sustainable investment that considers how ESG factors affect an investor’s portfolio rather than how investors can better or worse influence the wider world.
21st Century Investment Can be most valuable when explaining the theory with practical examples. It presents an interesting case study on how investors can affect long-term value creation (Norse Bank Investment Management), ESG (Alliange) integration and public policy (CalPERS and Aviva Investors). Clearly, what can be achieved depends on size. A “public owner” like Japan’s government pension investment fund can influence external managers and other investors in a way that small investors cannot.
One of the peculiarities of the book is the lack of reference to the regime, G in the ESG. ESG’s standard approaches can equate governance with environmental and social factors. The International Corporate Governance Network relates governance to long-term value creation, sustainable economy, social prosperity, and a healthy environment, shared interests by the authors of this book. Absence of rule from 21st Century Investment It raises questions about how social and environmental commitments can be made to investors when the power of governance is unknown.
Another controversy is the lack of solid information about the size of the sustainable investor universe. Readers will not learn from this book how sustainable and system-level investments are compared to conventional investments. The United Nations PRI (Principles of Responsible Investment) mentions nothing more than $ 100 trillion managed by the signatories and no information on how sustainable investment in assets reached .3 35.3 trillion under management in five major markets by 2020. Global Sustainable Investment Alliance (GSIA). Numbers like this will show that sustainable and system-level investment is already an important part of the global investment universe.
Although the book points to a flagship movement, much of what has been discussed will already be familiar to many investors.
- The system-level investment impact seems to be closely related to investment, which GSIA defines as “investment to achieve positive social and environmental impact.”
- Parts of the six-step roadmap echo other structures, such as PRI’s “Investing with SDG Results”
- Many of the techniques described can be found in a standard ESG toolbox. The authors label the activities adopted by New Zealand Supernuration as “Diversity of Approach”, but the combination of ESG integration, managers’ observation, research, engagement, industrial collaboration, etc., seems to be an ideal collection of sustainable investment tools.
Moreover, little attention is paid by many sustainable investors to the difficulty of the experience, which includes data inconsistencies and the “green wash problem”.
This book deals with important issues. One of its strengths is that it clearly describes why investment should be included in financial analysis. Moreover, it presents a tool that can facilitate the integration of these considerations in the investment decision making process and help the investment community to play an important role in solving social and environmental problems. These tools may be familiar to experienced sustainable investors, but nonetheless the book describes an evolution in the field of investment that could have a profound impact on the world in the 21st century.
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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed must not reflect the views of the CFA Institute or the author’s employer.
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