Incorporating Environmental, Social and Governance factors
Amidst all of the important improvements in ESG data, all of the thoughtful research reports, and all innovative new investment options, another, deeper trend has taken root. As we turn towards 2019, we see increasing evidence that systems thinking is becoming more prevalent and influential throughout corporations and the investment community. This subtle, under-the-surface development is one of the most vital requirements for effective long-term investing.
Why is this wonky-sounding idea important? Systems thinking is a deceptively simple concept, a holistic approach to analysis that focuses on how parts of a broader system connect and relate to one another. You know that old saying, the whole is greater than the sum of the parts? Systems thinking aims to understand the whole, in addition to the individual parts. (For a great overview of systems thinking, I recommend Donella Meadows’ classic “Thinking in Systems” or “Leverage Points: Places to Intervene in a System”).
Systems thinking is a close cousin to common sense, but it stands in contrast to the arc of development of our analytical and educational tools. Over time, these tools have focused on more and more narrow lines of inquiry, examining more and more specialized questions. This expertise is needed, of course, but it is even more powerful when our specialized knowledge is combined with an understanding of the greater context. For example, when we recognize environmental, social, and governance issues as deeply intertwined with all other business issues, and when we recognize business issues as deeply intertwined with the broader health of our planet and our communities, we have the chance to develop more complete views, and to make better investment decisions. Without the reconnection that systems thinking brings, all of the metrics in the world will not lead us to better outcomes, no matter how thoughtful, needed, and accurate they may be.
Evidence of the rise of systems thinking is all around us, though it is not usually labeled as such. When Silicon Valley leaders talk about having “growth mindsets,” that’s systems thinking. When companies link their operations to the United Nations Sustainable Development Goals, that’s systems thinking.
When investors call for an examination of purpose that goes beyond a simple business plan, that’s systems thinking. When a research report that used to contain only short-term financial information has new sections talking about rights of Indigenous communities, and policy changes, and customer demographics, and shifts in weather patterns, that’s systems thinking. When one potential new hire after another tells you about their multidisciplinary senior thesis, that’s systems thinking.
As these deeper reconnections between issues and disciplines and data sets take root, there are three powerful benefits that can arise for investors. First, we have the chance to extend our time horizons. Much has been written about the dangers of short-term-ism, both in business and in life, but we often lack processes that can serve as counterweights to the ever-faster pace of shallow data flows like stock prices. Diving into analysis of purpose and impact naturally stretches our time horizon out, so that our units of analysis more closely match the scale of real results, the ones that compound across many quarters and many years. Interestingly enough, extending our time horizon allows us to focus on the most urgent issues of our time, from climate risk to workplace equity to the ethics of emerging technologies.
Second, a systems mindset allows us to ask better questions. In addition to pursuing straightforward answers to our tactical questions, we can pursue more open-ended inquiry that goes beyond a checklist mentality. For example, instead of asking only for a list of supply chain policies, necessary though that is, we can begin to ask about how actual practices have changed over time, and about what challenges still do not have satisfactory solutions. These questions don’t always have easy answers – and in fact they sometimes don’t have answers at all – but they get us closer to a truer, more complete understanding of the links between an income statement and the actual world.
Finally, this reconnection allows us to begin to assess impact in a more complete and nuanced way. Impact metrics are quickly advancing, and companies are taking this analysis seriously, in part because it allows them to begin to answer the most essential question of all: is what we’re doing truly valuable? This is a different question than whether revenues are growing, or whether returns on financial capital are adequate…
SOURCE: GreenMoney Journal
An article on ESG & Systems Thinking by Katherine Collins, Head of Sustainable Investing, Putnam Investments
Read her full Blog post here – https://greenmoneyjournal.com/esg-outlook-for-2019
Cliff Feigenbaum, founder and managing editor
GreenMoney Journal and GreenMoney.com
+1 (505) 577-1563
KEYWORDS: systems thinking, esg, Sustainable, impact, Investing, environmental, social, governance, SDGs, sustainable development goals, data, Technology, Innovation, Silicon Valley, long-term investing, Donella Meadows, Putnam Investments, katherine collins, growth mindset, indigenous communities, equity strategies, biomimicry, investment research, societal, Investment, trends, GreenMoney Journal
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