Key Takeaways from the 4th Annual Symposium on System-Level Investing

“Investment decisions shape systems and those systems dictate investment outcomes.” – William Burkhart, Co-Founder, The Investment Integration Project

System-level investing focuses on addressing large-scale environmental, social and financial challenges that can affect long-term performance across investment portfolios and markets. It is based on the idea that investors – particularly large asset owners – can influence the systems they invest in through capital allocation and stewardship activities. It also acknowledges that many of the biggest risks to long-term returns come from systemic issues, such as climate change, income inequality, and economic stability.

For the past decade, The Investment Integration Project (TIIP) in the US has been developing system-level investing approaches and collaborating with investors globally to implement them. Here are key takeaways from their 4th Annual Symposium on System-Level Investing held in New York City last week:

1. Investors Are Undervaluing Systemic Risks

Understanding and accounting for systemic risks can protect portfolios from unexpected downturns. According to research by Jon Lukomnik – co-author of Moving Beyond Modern Portfolio Theory: Investing That Matters – 75 – 90% of investment returns are tied to market performance and not individual security selection. Modern portfolio theory, which focuses on diversification, often misses broader systemic risks. By prioritizing alpha (relative performance) and ignoring beta (systemic risks), investors create blind spots — especially universal owners like large asset owners who need to consider risks that impact their entire portfolio.

2. Pension Funds Are Addressing Systemic Change

Forward-thinking pension funds are integrating systemic risks into investment practices to improve long-term outcomes. Pension funds like CalSTRS are evolving their strategies to incorporate practices including board education; embedding systemic risks into investment beliefs; evolving engagement and stewardship activities to actively participate in field-building initiatives like the Principles for Responsible Investment (PRI), Climate Action 100+, and the International Sustainability Standards Board (ISSB); and policy advocacy intended to drive change in financial systems, such as climate disclosure regulations in jurisdictions like California.

3. Foundations and Endowments Have Unique Leverage

Foundations and endowments, like the Surdna Foundation, are tackling systemic issues like racial inequality by using different financial and non-financial tools. In addition to return-seeking endowment investments, Surdna uses program-related investments (PRIs) as catalytic capital that concedes returns to fund more innovative solutions aligned to priority systemic challenges. They also contribute to field-building activities and work directly with their advisors and investment managers to evaluate how they are meeting their objectives. Surdna also uses insights from their impact investments to enhance how their investment managers address systemic risks in their main endowment (e.g. how effectively are the systemic effects of inequality being captured in the evaluation of healthcare investments).

4. ESG Opportunities Intersect with Systemic Issues

Research from Japan revealed that while companies with higher ESG ratings demonstrated stronger financial performance in the US and Europe, this curiously wasn’t true in Japan. The key difference was that Japanese investors focused on mitigating ESG risks rather than capitalizing on new opportunities. Takeshi Kimura, Special Adviser to the Board at Nippon Life Insurance highlighted that while risk management is important, some risking-taking is required to achieve sustainability objectives. In speaking about his experience following the Fukushima nuclear disaster in his hometown in Japan, he emphasized how Japanese investors are learning to evolve their ESG strategies to account for the intersections between systemic issues – people, planet, economy – instead of managing for just the risks in silos.

5. Fiduciary Duty Requires Adapting to Manage Systemic Risks

As highlighted in the PRI’s Legal Framework for Impact, a strong fiduciary process reflects investment beliefs and practices that are continuously shaped by systems-level considerations.  Investors who overlook systemic risks may miss long-term value and face unexpected costs.

Tiffany Reaves, Partner at Faegre Drinker, explained that fulfilling fiduciary duty involves several core principles:

1. The duty of loyalty requires avoiding conflicts that could compromise responsibility to beneficiaries. Systemic risk management is required in portfolios exposed to the entire market that cannot be addressed solely through diversification.
2. The duty of impartiality means balancing both short-term needs with the ability to build towards long-term capital growth. Managing systems-level risks today allows investors to maintain short-term performance without sacrificing long-term returns.
3. The duty of prudence calls for investors to have a forward-looking, process-oriented, and dynamic method of assessing all relevant material facts. Systems-level investing empowers investors with a methodology to evaluate the full breadth of material facts.

At Quinn+Partners, we advise investors on managing systemic risks while also driving positive outcomes through their investments in a changing world. If you are ready to take the next step on your sustainable and impact investing journey, please get in touch.