There has been a rising interest in environmental, social, and governance (ESG) issues among investors, with a wide variety of products on offer from service providers. A value chain perspective on ESG is becoming increasingly common in the finance sector, meaning that activities throughout supply chain, product use, and waste management are considered.

Dimensions of systems thinking

The pilot study identifies six dimensions of systems thinking that would be useful for investment and asset management:
1. Are multiple dimensions of the sustainability agenda considered?
2. Are positive and negative impacts systematically considered?
3. Are more complex effects including indirect effects considered?
4. Are direct and indirect impacts producing co-benefits and trade-offs within the system?
5. Is there a long-term perspective?
6. Are large and small impacts distinguished?

Findings

The report finds systems thinking is a challenge for the finance sector. The finance sector has a strong focus on quantitative data, aggregation, comparability, and the use of benchmarks, which may be challenging to integrate with a systems approach to understanding sustainability impacts of capital allocation decision. The amount and type of data that analysts would need to collect and the complexity of the sustainability interactions to be assessed make a highly quantitative approach to systems thinking very demanding.

Investors and sustainability analysts typically have wide portfolios and significant amounts of data to deal with. A systems perspective needs to come in at an early stage to help prioritise the most significant sustainability impacts for a particular sector or company and put more fine-grained data into context.

The report reveals that when working with the Sustainable Development Goals (SDGs) in capital management, there is a risk that companies and investors only report on a few SDGs and only those goals they have had a positive effect on. The lack of standardised approaches to SDG analysis was considered negative.

Conclusion

The report concludes that systems thinking is particularly useful in the early stages of analysis, whether to inform an investment decision or to engage in dialogues. A systems analysis can be used to identify and prioritise the most significant sustainability impacts for a particular sector or company and put more fine-grained data into context. In this context, workshop participants emphasised the role of researchers in providing in-depth systems analysis and translating research results to enable implementation in practice. Capacity-building or training efforts targeting asset managers might help with this.

The report calls for a broader range of relevant sustainability aspects for specific companies and sectors to be measured; systematic consideration of both positive and negative impacts; and more standardised sustainability reporting, whereby companies would be required to report transparently and be audited on their performance, similarly to financial reporting. With EU regulations developing rapidly, the effects in coming years will be interesting. Reporting should cover both impacts that result in business risk and impacts that affect society and nature in general, i.e. double materiality.