Views on improving the integrity of global capital markets
12 April 2021

ESG Q&A: 21st Century Investing

We are talking today with Steve Lydenberg and William Burckart about their new book 21st Century Investing: Redirecting Financial Strategies to Drive Systems Change. Steve is founder of The Investment Integration Project (TIIP), an applied research and consulting firm launched in 2016, and is a partner for strategic vision at Domini Impact Investments. William leads TIIP and is a fellow of the High Meadows Institute. The book posits that we are entering a new stage of investment practice called “system-level investing” that takes into account the systems that we operate in and the impact our investment choices have on those systems.

CFA Institute: Steve and William, can you describe what the title means, 21st Century Investing, and explain what you call system-level investing?

William: Twenty-first century investing is an extension of investment practices of the 20th century. As times change, it is natural that investment will evolve as well. Given the complexity and interconnectedness of the global economy today along with the powerful role finance plays in shaping it, investors increasingly acknowledge their impact on the foundational social, financial, and environmental systems underlying their investments and seek to manage the risks to these systems and optimize the rewards they offer. In doing so, they move beyond management of individual security risks and rewards as well as those of portfolios to focus on the risks that impact their portfolios across all asset classes.  

CFA Institute: Can you talk a bit about the evolution of our investing world? You describe system-level investing as a third stage of investing. What were the first two and how did we get to where we are today?

Steve: The early days of investment focused on the risks and rewards of individual securities. Investors were cautioned not to invest in highly risky securities. Legal lists of blue-chip stocks and investment-grade bonds dictated the investment universes appropriate for pension funds and fiduciaries.

In the second half of the 20th century, investment theory advanced and, with innovations in information technology and the availability of new investment asset classes and techniques, investors came to manage risks at their portfolio levels. Best practice became diversification of risk across securities and asset classes, thereby expanding investment universes and the return opportunities without necessarily increasing the risks of overall portfolios.

As we entered the 21st century, it became apparent that our increasingly populous world with its complex interconnected social, financial, and environmental systems could generate global risks that impact investments across all asset classes and therefore could not be diversified away—climate change being among the most apparent of these. Income inequality is another example, as are food security and diversity, among others.

William: Steve is absolutely correct. Investors may be tempted to ignore these risks, believing with some reason, that governments are better positioned to address such risks. But because of the dominant role of finance in the world today, it is difficult for investors not to acknowledge their contribution to such systemic risks and therefore their ability to contribute positively to their resolution.

CFA Institute: CFA Institute is undertaking a project on materiality to help ameliorate some of the confusion around the world about this issue and highlight best practices. Can you talk a bit about your views on materiality and how it informs your research?

Steve: We applaud CFA Institute’s ongoing work on materiality and disclosure requirements. Investors thrive on data but vary greatly in their interests. Compelling disclosure of information of interest to only a handful of investors is clearly not a productive path forward. But as CFA Institute has noted, “the perspective of an investor must be central to the definition of materiality.”[1] As investors’ consensus coalesces around the importance of such issues as climate change and income inequality, the materiality of disclosure for them naturally increases. As Bob Eccles and Truevalue Labs have pointed out, materiality is a dynamic concept that can be affected by emerging regulations, societal expectations, and scientific findings among other factors and that varies from industry to industry, as well as from time to time.[2]  

William: Materiality differs somewhat from what TIIP views as the necessarily high bar that investors need to set to justify integrating comprehensive techniques aimed at system-level risk management. To be a truly systemic concern, an issue must have been broadly debated and a general consensus reached as to its importance; it must impact investments across asset classes; the investor must have the skills and resources to exercise a mitigating influence on the risk; and uncertainty about the nature of the risk itself and its broad impacts must be such that traditional security valuation and portfolio risk-management techniques cannot adequately contend with it. For example, scientists can tell us that an increase in global temperature of 3–4°C will trigger sea level rise between 20 and 100 feet, but an investor will be hard pressed to derive from that any sense of the systemic societal risks that will arise from such things as the mass migrations that will in all likelihood follow.

CFA Institute: Can you tell us what it means to manage system-level risks, why it is important to do so now, and how to integrate this new way of thinking into their current practice?

William: Integrating system-level risk management involves both the extension of current conventional techniques and the adoption of newer methods that are currently being explored by forward-looking investors. These techniques can exercise influence at key leverage points within systems to recalibrate them and produce positive outcomes from the outset. Investors can thereby avoid having to contend with a never-ending series of undesirable outcomes from a system that is basically out of kilter. With systemic challenges likely to be on the increase in the 21st century, integration of these techniques into standard practice may be of greater use.

CFA Institute: A number of efforts are underway to establish standards and form better disclosures around environmental, social, and governance (ESG) data and climate change, with the Sustainable Accounting Standards Board (SASB) and Taskforce on Climate-related Financial Disclosure (TCFD) being two of the most prominent, and the International Financial Reporting Standards (IFRS) now throwing their hat in the ring. Are these standards fit for purpose and where do you see these disclosure standards heading in the near future?

Steve: These are crucial pioneering efforts that will set standards for disclosure relating to the complex issues that will arise. The question of whether these should be standards for mandatory or voluntary disclosure is still to be resolved. Mandatory disclosure may make the most sense for those issues that clearly pose systemic risks.

CFA Institute: One of the main issues with ESG investing these days is the data. What is the state of data these days and what data is still needed to facilitate the system-level investing you are talking about?

Steve: The work of Sustainable Accounting Standards Board (SASB, Global Reporting Initiative, CDP (formerly Carbon Disclosure Project), Taskforce on Climate-related Financial Disclosures (TCFD), and similar organizations has made great progress in the development of key performance indicators (KPIs) for material data. Efforts currently underway to rationalize these varied sets of KPIs promise to simplify this landscape.

Additional challenges, however, remain. Given that material social, financial, and environmental considerations and systemic risks are likely to wax and wane over time, it will be crucial to know not only the data most relevant today but also when the need for that disclosure has passed. The flexibility required to manage the dynamic nature of materiality means incorporation of an equally dynamic change in KPIs over time.

CFA Institute: Are policy makers around the world beginning to integrate system-level thinking into policy and regulation? What still needs to be done?

Steve: It is through concern for investors’ responsibility for stewardship of their assets that policy makers and those concerned with corporate governance are gradually integrating the language of systemic risks. For example, in the UK  Stewardship Code 2020, Principle 4 directs asset owners and managers to “identify and respond to market-wide and systemic risks to promote a well-functioning financial system” and identifies climate change as among the “[s]ystemic risks . . . that may lead to the collapse of an industry, financial market or economy.”[3]  In addition, the International Corporate Governance Networks’ Global Stewardship Principles states that investors “should prioritize the mitigation of system-level risk and respect for basic norms (e.g., anti-corruption, human rights) over short-term value.”[4]

Although the integration of ESG (environmental, social, and governance) factors, when material, into security valuation and portfolio risk management has won broad acceptance in the financial community, the consideration of the virtues of integration of systemic risks and rewards into investment best practice is still at an early stage. CFA Institute recently called out the integration of “system-level thinking on top of traditional investment thinking, in an additive and complementary way” as one of six key actions needed for progress toward sustainability in investment.[5]

CFA Institute: You talk about the six steps to system-level thinking in the book. Can you walk us through those steps to discuss what investors can do to best integrate system-level thinking into the investment process?

William: Certainly. The first step is for the investor to acknowledge the usefulness of setting goals for system-level influence. Second, they will want to focus on an issue that they can justify as being truly systemic [and] understand its relevance to their investments across asset classes and their ability to exercise influence on that issue at a system level. Third is the integration of this systemic consideration into their asset allocation discipline, appreciating which asset classes are best designed to exercise influence with relation to their particular issue of concern.

Investors are then positioned to evaluate how four of their conventional investment practices (security selection, engagement, manager due diligence, and policy and beliefs statements) can be extended to exercise influence at key leverage points with the system in question. As a fifth step, key to the process, they can then assess which newer techniques might be particularly effective given present circumstances. These techniques can be grouped into three broad categories: (1) field building through participation in collaborative organizations, sharing of baseline data, and supporting relevant public policy initiatives; (2) investment enhancement through standards setting, identification of solutions, and adoption of a diversity of approaches relative to the issue of concern; and (3) opportunity generation through an appreciation for additionality of financial products addressing unmet needs through incorporation of system-level considerations, incorporation of difficult-to-quantify, long-term metrics into valuation processes, an understanding of the financial and systemic impacts of local systems and economies, and the utility that specific asset classes can bring to the management of social, financial, and environmental systemic risks.

Finally, investors will want to tackle the task of assessing their contribution to positive developments at a system level. This exercise must recognize the imprecision of attribution of impact when collective action within complex systems is involved. In addition, investors will want to keep an eye on the long-term goal of improved outcomes from the system itself, evaluating the stages of that progress relative to their efforts.  


[1] Mohini Singh and Sandra J. Peters, Materiality: Investor Perspectives (Charlottesville, VA: CFA Institute, 2015), 7.

[2] Robert G. Eccles, “Dynamic Materiality in the Time of Covid-19,” Forbes (blog), 19 April 19 2020, https://www.forbes.com/sites/bobeccles/2020/04/19/dynamic-materiality-in-the-time-of-covid-19/?sh=63b26a144f07.

[3] Financial Reporting Council, UK Stewardship Code 2020 (London: FRC, 2020), 11.  

[4] International Corporate Governance Network, ICGN Global Stewardship Principles (London: ICGN, 2016), 19.

[5] CFA Institute, Future of Finance, Future of Sustainability in Investment Management: From Ideas to Reality.  (Charlottesville, VA: CFA Institute, 2020) 52.


Photo Credit @ Getty Images / SEAN GLADWELL

About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a senior director of capital markets policy at CFA Institute, where he focuses on corporate governance, ESG, and climate change analysis. He writes and speaks frequently on these topics on behalf of CFA Institute. His paper, Climate Change Analysis in the Investment Process was named “Best ESG Paper” by Savvy Investor in 2021.

1 thought on “ESG Q&A: 21st Century Investing”

  1. Beverley L Kennedy says:

    The Ont securities commission and it’s peers are woefully out of date in their approach to compliance and investor and capital market risk
    And the delegation of retail concerns to sros like Iiroc mfda ( and obsi) where dealer brokers continue to insert liability and compliance disclaimers right into the terms of service retail must consent to if they wish to open accounts to participate in the capital markets.

    Osc and peers doesn’t seem to understand that there are newer business models serving retail that also have compliance onus. That the industry especially the banks are trying to skirt by inserting problematic “conditions”

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