Turn off the Engines 

Investment in system change is the fast track to sustainability and profit, according to former Innovest ESG research head Frank Dixon.  

Frank Dixon wants you to help silence the motors that are propelling humanity into a conflict with nature which it can only lose. By this, he doesn’t literally believe switching off the internal combustion engine in your car can ensure we avoid ecosystem collapse. Although, I’m sure he views this as a necessary part of the process. 

Rather, he wants you, as investors, to oppose and extinguish the political and economic systems that reward companies for contributing to nature exploitation and destruction – not to mention myriad social harms. 

It sounds a big ask. But Dixon, once a driving force behind the world’s biggest ESG ratings franchise, says it’s simple. Even better, it will make you money.  

Dixon argues that investing in firms that understand and embrace the need for systemic change will be profitable both in the short and the long term. Indeed, at a time marked by accelerating system collapse, he suggests it defies logic to do anything else.  

“Going forward, system change is the most important sustainability issue. For companies to be seen as sustainability leaders, they’re going to have to have a strong system change component to their sustainability strategies,” he says. 

Change for the better  

Dixon is a leading pioneer and proponent of systems change investing (SCI). His work was initially inspired by an insight he made as Managing Director of Research at ratings firm Innovest, later acquired by MSCI: that firms can only achieve on average a 20% reduction in the economic and social harms they cause before they run into the financial barriers, i.e. loss of revenue and competitiveness, erected by the frameworks and rules that govern their operation.  

Only far-reaching changes to those systems can free the firms to fully operate in a way that does not harm the planet or people. These systems are changing, or indeed breaking down; they will be rejected, replaced or refined over time because of their conflict with nature, says Dixon.  

Thus, the firms – and their investors – that align themselves with systems change, are best placed to adapt to and profit from system change. Dixon argues that SCI can deliver both short- and long-term benefits.  

“This approach can provide alpha for two main reasons. First, companies that understand the need for system change and work for it in a practical way are going to do many other things well. They are going to outperform because of management quality. Also, they’ll be addressing systemic risks and opportunities that are not taken into account by ESG and financial analysis,” he says.  

Turning to long-term returns, Dixon says SCI faces a similar problem as that which previously confronted ESG, i.e. the assumption that investing in ‘good’ companies would deliver lower returns than allocating capital with a sole focus on profit, regardless of the externalities.  

“But that assumes that current systems can be maintained, which is highly unlikely. If you do nothing about systems change, the systems will change by themselves, which will wipe out vast amounts of investment and put companies out of business,” he observes.  

Keeping things the same and continuing to profit by degrading the environment and society, is not viable when systems are in the process of breakdown.  

“If you voluntarily change systems in ways that protect the environment and society, companies are still going to be able to profit, but they won’t be profiting by destroying environment and society. That will protect and enhance long-term returns, compared to what will happen if you do nothing.” 

The status quo, insists Dixon, is not an option, arguing that we are very likely experiencing a phase of “rapid system change”. 

He adds: “Comparing it to the current system is a fantasy. The current system of profiting by destroying that which enables business existence is obviously going to end at some point.” 

Time to act 

Dixon’s approach may currently sit on the margins of sustainable investing, but he is not alone.  

The Investment Integration Project (TIIP) and the Sustainable Investing Research Initiative (SIRI) at Columbia University’s School of International and Public Affairs recently announced a strategic partnership to advance the field of system-level investing and “foster greater cross-disciplinary scholarship in the field”.  

A number of philanthropists are allocating small percentages of their AUM to versions of SCI, but Dixon is eager for mainstream adoption, which he says needs to be – and is – relatively easy to achieve.  

“When we don’t have much time to act, we have to find ways to make things simple, clear and easy,” he says.  

At a basic level, SCI can mean overlaying an ESG fund with a handful of system change metrics in addition to existing investment criteria. Possible metrics might include: does the firm have a system change strategy; is the CEO talking about system change; does it have system change goals?  

“By taking a mainstream fund, and putting a system change overlay on it, you are using the big money i.e. large cap equities. That’s going to do more to drive system change than any of these other types of SCI.” 

According to Dixon, SCI offers many opportunities for asset managers to differentiate themselves, growing reputation and assets, in a crowded ESG market. “If they come out with a fund that’s addressing root causes and can provide equal or better returns, it’s going to enhance their short-term returns,” he says. “SCI is about enhancing returns in the same way as ESG, most importantly by shifting investments to better managed companies, that do many things well and make more money.” 

He’d like to collaborate with asset managers, owners and ratings providers and is actively in discussions to do so.  

No ‘right way’ 

Dixon is already rating global firms on their systems change performance, including consumer goods giant Unilever.  

He says there’s no ‘right way’ to rate system change. His own system change model – developed over the past two decades – has three categories: traditional ESG, mid-level system change and high-level system change.  

Unilever scores well. “They’ve been a long-term ESG leader. At the mid-level, they’ve been doing work for years, collaborating on sustainability issues. At the high level, they’ve proactively lobbied the EU on sustainability issues,” says Dixon. 

In a 2022 research note, Dixon commends Unilever for recognising that “system change and collaboration are essential for achieving their environmental and social goals”. As evidence, he points to its Sustainable Food Lab, established in 2004, to work collaboratively with farmers, suppliers, NGOs, governments and other allies “to address issues including farmer poverty, soil health and climate change”. 

Other examples of the firm’s positive efforts toward system change include working with the Ellen MacArthur Foundation to drive systemic change by promoting a circular economy for plastics, as well as collaborations with other stakeholders on diversity and human rights.  

Unilever only achieves a ‘good’ rating when it comes to high-level system change as it has not yet identified “necessary” economic and political system changes, such as “more accurate measures of social wellbeing than economic growth, internalising costs, and accurately valuing future generations and all life”. 

And while Unilever attains relatively high scores across the board, no firm warrants a high score on high-level system change, says Dixon, in the absence of systemic change in economic and political systems.  

Natural law  

But what is the end-state that system change is seeking through this realignment of capital?  

Dixon has developed his theory of Global System Change in several books. In his research notes, he says it “uses the laws of nature to clarify sustainable society, and then identifies major systemic changes and actions needed to achieve it”. Firms are rated, essentially, on their efforts toward this sustainable society.  

“Science shows us that life has existed on this planet for 3.8 billion years, and it has continuously evolved within a set of constraints,” says Dixon. “Whenever a life form violated those laws, it either changed or disappeared. Those fixed laws of nature define and control life on this planet. Humans sometimes think we’ve separated ourselves from nature, but those laws will 100% control humans going forward.” 

Despite having spent much time developing his approach, Dixon is wary of too much theory and not enough practice. This is understandable, especially if you remember the Natural Law Party, backed by George Harrison, and a fringe feature of the 1990s UK political landscape.  

Dixon says the topic is complex, and fears frightening off asset managers, but the principles he is looking for humanity to embrace are familiar and almost prosaic.  

To name a few, they include: living off renewable resources; overwhelming cooperation, with limited competition at the individual level; equitable resource distribution; seeking a balance not growth; decentralising governance and production; implicitly equally valuing generations and species; and enabling individuals to reach their fullest potential. The implied operating principles for society include full employment, full cost accounting without externalities, and self-government and democracy.   

“There could be an infinite number of ways that humans could abide by those laws, but there are zero ways we can live outside those laws over the long term,” says Dixon.  

Those interested in delving deeper can dive into Dixon’s archive of articles and books outlining his approach, and his firm belief in the need for overhaul of prevailing economic and political systems.  

“A primary overarching economic and political system flaw in the business area is the failure to hold companies fully responsible for negative environmental and social impacts. Only government can do this. But governments that are heavily influenced by vested interest, such as the US government, are unlikely to change themselves,” he writes.  

While he is committed to a whole system approach to the organisation of the human world, taking the implied perspective of nature, Dixon also recognises, “We can’t spend time debating what sustainability or system change means.” 

The important thing, he says, is to mobilise the power of investing. And fast. “Take what’s already being done. Virtually every large asset manager has ESG products. Do a slight modification to current ESG ratings by adding system change metrics, then develop the same kinds of funds and market them through the same channels. All I’m talking about is enhanced ESG.” 


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