Background on system-level investing

The report argues that diversified investors’ long-term returns are driven primarily by overall market performance (“beta”), not individual company outperformance (“alpha”). Research cited indicates that 75–94% of portfolio return variability is explained by systematic market factors. As diversification reduces idiosyncratic risk, investors remain exposed to systemic risks that cannot be diversified away.

Systemic risks arise when companies externalise social and environmental costs. These costs depress GDP and weaken the economic systems underpinning diversified portfolios. The report notes that publicly listed companies imposed an estimated US$2.2 trillion in social and environmental costs annually in 2018, exceeding 2.5% of global GDP and more than half of reported profits. Such externalities create macroeconomic drag that ultimately reduces long-term portfolio returns.

The report distinguishes between systematic risk (market-wide) and systemic risk (risks to the real-world systems that sustain markets). For universal owners with broad exposure, reducing systemic drivers of market risk is rational portfolio management. Investors are encouraged to prioritise macroeconomic impact over enterprise-level gains where conflicts arise.

Practical guide: Integrating systemic & macroeconomic risk

This section provides a structured approach for incorporating macroeconomic risk into shareholder resolutions, proxy voting and company dialogue. Investors are advised to:

• Identify systemic issues linked to company practices.
• Assess economy-wide impacts using GDP or other macroeconomic indicators.
• Connect these impacts to portfolio-level return implications.

Template language is provided to integrate macroeconomic arguments into resolutions and proxy materials. Examples link biodiversity loss to US$44 trillion in economic value dependent on nature, and climate inaction to potential 50% global GDP losses by 2070 under high-emissions scenarios.

The report emphasises stewardship tools, including shareholder proposals, exempt solicitations, proxy memos and direct engagement. It provides sample arguments showing how issues such as second-hand smoke exposure, inequality or climate inaction generate public costs that weaken workforce productivity and economic growth.

Investors are encouraged to establish “guardrails” to prevent companies from pursuing profit strategies that harm systemic stability. Where company and portfolio interests diverge, shareholders are urged to steward capital in line with long-term diversified interests.

Resources for engagements

The report offers practical talking points and infographics illustrating how corporate externalities transmit from systemic harm to macroeconomic impact and ultimately to portfolio losses.

Sample language links specific sustainability issues to quantified economic risks. Examples include:

• Biodiversity loss threatening US$150 trillion in ecosystem services and over half of global GDP.
• Climate change potentially reducing global equity valuations by more than 40% under limited mitigation scenarios.
• Inequality slowing GDP growth by 2–4 percentage points annually.
• Forced labour elimination potentially increasing global GDP by up to 1.48%.
• Antimicrobial resistance posing potential losses of US$100 trillion by 2050.
• Workplace injuries costing up to 4% of global GDP.

These examples demonstrate how systemic issues translate into portfolio-level financial risk. The report references frameworks from PRI and CFA Institute redefining stewardship as protecting long-term overall value, including shared economic, social and environmental assets.

Examples of research

The report compiles studies quantifying macroeconomic costs across climate, biodiversity, inequality, public health, conflict and racial inequity.

Climate research suggests 1°C of warming may reduce world GDP by 12%, and physical risk could reach US$41.4 trillion (14.5% of GDP) by 2050. Nature loss could reduce global GDP by US$2.7 trillion annually, while ecosystem degradation may cost US$4.3–20.2 trillion per year.

Inequality research indicates racial discrimination has cost the US economy US$16 trillion since 2000, and closing wage and wealth gaps could add trillions to GDP. Gender equality could add US$12–28 trillion to global GDP.

Public health studies estimate air pollution costs equivalent to 6.1% of global GDP, obesity around 2–3.6% of GDP depending on country, and gun violence 2.6% of US GDP annually.

Conflict research suggests global GDP in 2014 would have been 12% higher absent violent conflict since 1970.

Collectively, the evidence supports the report’s core conclusion: systemic social and environmental harms materially threaten macroeconomic stability and long-term diversified portfolio returns, warranting system-level stewardship by investors.