Can systems-level investing solve social issues?

Traditional investment approaches are built on a clear separation: investors generate alpha, while beta – the broader market return – is treated as exogenous; something to optimize, but not influence.

Systems-level investing challenges this assumption. It argues that beta is not neutral, but instead is shaped by systemic risks such as climate change, inequality, and institutional fragility. These risks are not diversifiable, and therefore they directly affect long-term portfolio outcomes.

The implication is profound: if investors depend on the system for returns, then contributing to the health of that system is not optional – it is financially material.

This shift raises a fundamental question: where does an investor’s responsibility begin and end?

Historically, fiduciary duty has been interpreted narrowly, broadly defined as maximizing financial returns within a defined mandate. Systems-level thinking broadens this perspective. If systemic risks undermine long-term returns, then ignoring them may conflict with fiduciary duty rather than fulfil it.²

In this sense, systems-level investing is less about ‘doing good’ and more about protecting long-term value creation.

The success of climate investing shows how powerful this logic can be. There is now a strong consensus that the economic costs of inaction on climate change are significantly higher than the costs of transitioning to a low-carbon economy.³

This clarity has mobilized capital at scale. Climate sessions fill conference rooms. Yet, this momentum does not extend equally to social issues. While climate dominates the agenda, social topics such as inequality, human rights, labor rights, and access to education and healthcare, are often relegated to the margins, attracting far less attention in practice.

This imbalance is striking, given the evidence. A large body of empirical research shows that high inequality reduces long-term economic growth by weakening institutions, constraining human capital, and increasing instability. For example, it is estimated that rising inequality reduced cumulative GDP growth by 4.7 percentage points over 20 years in OECD countries.⁴ Other studies show different numbers, but the conclusion is always the same – inequality is negatively correlated with growth.

Conversely, studies show that investments in education, healthcare and strong institutions can both reduce inequality and increase productivity which strengthens economic performance. In other words, just like climate risk, social system degradation directly affects the beta that investors depend on.

So, why does social investing lag so far behind, despite its financial relevance?

Part of the answer lies in current investment practice. Today, most investor approaches to social issues remain limited to avoiding harm, often by excluding a small number of controversial companies, or through managing reputational risks.

This is fundamentally different from climate, where investors actively allocate capital to transition solutions, infrastructure and innovation. If studies are correct, then systems-level investing should also call for a similar shift in mindset for social issues, moving:

• From exclusion to systemic impact

• From risk mitigation to opportunity identification

• From isolated company analysis to system-wide outcomes

Emerging efforts, including the development of better standards and frameworks such as the Taskforce on Inequality and Social-related Financial Disclosures (TISFD), reflect this transition. They aim to move beyond measuring simple output and outcome metrics toward understanding how companies contribute to, or undermine, social systems, and what the financial impacts could be.

Critics argue that systems-level investing is not fundamentally new. It echoes earlier concepts such as universal ownership and sustainable development investing. And in a sense, they are right. The underlying logic has been known for decades.

What is new, however, is the urgency and the evidence. We now better understand how environmental and social systems translate into financial outcomes. We have stronger data, clearer frameworks, and growing regulatory momentum.

Despite its strong theoretical foundation, systems-level investing faces practical barriers. Firstly, even though there is a large body of evidence that climate and social investments improve economic resilience, transition investments are internal costs for companies, and the economic and social costs are borne by society. This does not give an immediate incentive for companies and investors to change. This is also due to the fact that investment horizons are not aligned, as the benefits often materialize over longer periods than typical performance cycles.

Secondly, systemic change requires coordination across investors, regulators, and companies. Investors alone cannot solve these issues, which is why they are increasingly engaging with governments and policymakers. And this is where the most important barrier lies. It is cultural. Investors are accustomed to competing for alpha, and not used to collaborating to improve beta.

Systems-level investing may not be entirely new, but it is increasingly unavoidable. For the climate, the case is already clear: investing in transition is cheaper than paying for the consequences of inaction. For social issues, the evidence points in the same direction: stronger social systems underpin stronger economies and are a prerequisite for sustaining long term returns.

The real question is not whether systems-level investing can solve social issues, but whether investors are ready to recognize that their portfolios already depend on solving them.

Footnotes

¹ System-Level Investing - TIIP The Investment Integration Project.
² https://www.netzerolawyers.com/publications/sustainable-fiduciary-duties---the-time-has-come-for-financial-fiduciaries-to-adapt-to-the-new-climate-reality
³ For example, the Stern review (2006), OECD (2015, 2021) – Climate Change Mitigation: Policies and Progress, https://web-assets.bcg.com/a1/fc/811b182f481fbe039d51776ec172/landing-the-economic-case-for-climate-action-with-decision-makers-wo-spine-mar-2025.pdf
⁴ https://www.oecd.org/en/publications/in-it-together-why-less-inequality-benefits-all_9789264235120-en.html