Systems-Level Considerations and the Long-Term Investor: Definitions, Examples, and Actions

On Harvard’s Corporate Governance and Financial Regulation blog, Steve Lydenberg, is Founder and CEO of The Investment Integration Project (TIIP), writes about his report on ESG factors in investment risk:

Integration of [environmental, financial, and social] systems-level considerations can help investors manage long-term risks and rewards while seeking competitive portfolio-level returns.The primary questions addressed in this post are:

What are the characteristics of environmental, societal and financial systems-level issues that make them relevant to long-term investors for integration into investment processes?

What are examples of these systems-level issues that rise to the level of significance for such consideration and how in practice can that level of significance be determined?

Four guidelines that can help long-term investors determine the relevance of systems under consideration are proposed:

Breadth of consensus as to the importance of the system under consideration

Potential of the feedback loops from the system to impact the investor’s portfolios positively or negatively

Potential for the investor’s policies and practices to impact the system positively or negatively

Degree of uncertainty about the potential outcomes that would ensue from fundamental disruptions at the systems level

The post examines six examples of systems-level issues that share these characteristics.Within broad environmental systems, the paper looks at the issues of:

Climate change

Access to fresh water

Within broad societal systems, it looks at the issues of:Well-being: poverty alleviation and access to healthcare

Dignity: human and labor rights

Within broad financial systems, it looks at the issues of:

Stability and credibility

Transparency of sustainability data

Source: Systems-Level Considerations and the Long-Term Investor: Definitions, Examples, and Actions

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