Systems Change Key to Future of Responsible Investment 

In a new book, the PRI’s former head of policy argues for a more focused approach that leans into systemic stewardship.  

The rapid growth of responsible investing has brought the industry to an inflection point requiring practitioners to reconsider their focus and purpose if they are to deliver on its potential, a new book contends.

Will Martindale, former policy director at the Principles for Responsible Investment (PRI) and ex-head of sustainability at investment management group Cardano, has published an in-depth account of the growth of the sector. In the book, he outlines the current market and regulatory landscape, drawing on personal experience and in-depth interviews with other experts.

Martindale also seeks to explain responsible investment’s limited impact to date and puts forward proposals to improve future outcomes, calling on large institutional investors to recognise and act on the areas of influence and impact that come with their role as universal owners.

“There are many future pathways for responsible investment including more focus on impact, improved disclosure, and enhanced stewardship,” Martindale told ESG Investor. “But systems change and systems thinking is an area where responsible investment needs to place much more focus.”

Defining systems thinking as “a holistic way to consider all the interactions the that could contribute to an outcome”, Martindale makes the case for systems change as a guide for institutional investors as they set future priorities, against the backdrop of an ongoing shift from shareholder primacy to multi-stakeholder responsibilities and impact awareness.

“We haven’t really sought to achieve systems change on the scale necessary to make significant progress,” he said.

During his time at the PRI, Martindale helped to launch the Sustainable Financial System (SFS) programme, which aimed to examine market practices, structures and actors to understand and challenge the barriers to sustainability. The SFS also set nine conditions to transform the financial system.

Limited real-world impact

Martindale recently left Cardano to establish Canbury Insights, a specialist consultancy working with asset managers and owners.

In his book, he attempts to explain what prevents investors from thinking and behaving as universal owners, challenging some of the assumptions around modern portfolio theory. He also considers the evolution of investors’ approach to policy change.

“If we focus on the UK market, many of the ways in which asset owners are structured have limitations around thinking and acting as a universal owner,” Martindale told ESG Investor.

As well as scale, the delegation of investment strategies by pension schemes and their tendency to manage against benchmarks also have played a key part.

“All this affects the ability of pension schemes to think and act in a way that properly addresses some of the challenges that universal owners would seek to address,” he added.

As mentioned in the book’s final chapter, Martindale thinks responsible investment has lost its way.

“For all the noise, it is unproven. In its current form, its contribution to real-world sustainability impact is limited,” the book reads.

But it also offers reasons to be hopeful, as a wholesale reappraisal of sustainable investing – including the establishment of minimum ethical standards – could help investors to “make a difference”.

Systems momentum 

Although systems thinking is yet to gain a strong foothold among asset owners, Martindale’s book charts increasing momentum in related areas. Those include the growing trend towards systemic stewardship among large institutional investors, as well as a growing focus on engagement with policymakers alongside more traditional forms of asset stewardship.

System stewardship, which refers to investors’ practice of minimising the impact of systemic risks they cannot diversify away from, has received increased attention in recent years. Organisations including Aviva Investors and The Investment Integration Project have outlined possible approaches.

While systemic risks include climate change, they can also refer to a wider range of issues with the potential to cause widespread disruption to established socio-economic structures and models. Such disruptions include rising income inequality, anti-microbial resistance, water-related risks and increases in long-term health issues.

Investors have increasingly engaged with portfolio companies on systemic risks – both through direct engagement and voting activity, and via participation in collaborative stewardship initiatives such as Nature Action 100, launched following the signing of the Global Biodiversity Framework.

A consultation launched by the UK’s Financial Conduct Authority in February last year asked for feedback from asset owners and managers on possible steps to remove barriers to systemic stewardship. The regulator was due to engage in a wide-ranging review of UK legislation relating to stewardship in the second half of 2023 alongside HM Treasury, the Department for Business and Trade and the Financial Reporting Council.

In the book’s section on systemic stewardship, Martindale calls for “properly resourced” collaborative and systemic stewardship on sustainability themes, underpinned by what he describes as clear real-world sustainability goals working across the intermediation chain, and clear escalation measures engaging companies, regulators and stakeholders in pursuit of the goals.

“Smarter” use of influence

In parallel with the rise of systemic stewardship, institutional investors have increasingly sought to exercise greater influence on government policy. They have done so both through direct advocacy efforts on measures relating to systemic risks, and by increasing scrutiny of investee firms’ lobbying activities.

This growing focus is partly due to a nascent appreciation of the effectiveness of corporate engagement among investors, which has led some of them to explore other channels of influence.

“If there are areas where we are severely unable or even ineffective at achieving change, understanding the limitations of responsible investment can allow us to focus more on the issues that we can change,” Martindale said.

“Responsible investment is consistent with long-term enlightened value creation. Where there are inconsistencies, that would suggest a market failure and the role of investors is to engage policymakers to address that market failure.”

The Net Zero Asset Owner Alliance has called on asset managers and investee companies to ensure their lobbying activities are consistent with their public commitments, particularly as it relates to climate change. Meanwhile, recent proxy voting seasons have seen a steady stream of shareholder resolutions calling for transparency on corporate advocacy activity, including spending.

In addition, collaborative investor programmes – including the PRI’s Spring stewardship initiative – have been aiming to hold investee firms to account for policy positions. Others have addressed policymakers directly, such as the Investor Policy Dialogue on Deforestation.

In his book, Martindale contends that investors need to get “smarter” on how they think about wielding influence at the corporate and governmental level. However, he adds that there is currently “little clarity” on how either that influence, or real-word impact, is defined or measured.

While at Cardano, he helped to draft a model of influence that aimed to create a practical framework for targeting investor influence effectively. As well as articulating objectives, such as the maximisation of risk-adjusted returns and real-world sustainability impact, the model also tiers activities according to likely effectiveness. Tier one sustainability-focused activities included the supply of capital, collaborative corporate as well as public policy engagement, and innovation in impact investing.

“We investors don’t achieve change in our own right,” said Martindale. “We achieve change through the companies and governments through which we invest. We need to be clear that we’re an actor in the intermediation chain, not directly responsible for the change itself.”

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