The next big thing?

Tasha Kostyuk @tashakostyuk

5 Jun 2026

System level investing is being touted as the next big thing in sustainable finance but it’s not without it’s problems

I recently joined a panel on System Level Investing at the RI Europe 2026 conference in London. This idea has been popularised by the books of John Lukomnik, James Hawley, and William Burckart (Beyond Modern Portfolio Theory, 21st Century Investing, and The Handbook of System Level Investing). I think I was chosen as the bad cop because of my academic papers suggesting that investor action on climate change might have limits and my practitioner-oriented work arguing for a more focused, pragmatic, and modest framing for investor climate action.

In fact, as any careful reader of my work will know, I don’t think the ideas behind System Level Investing are completely dumb - indeed I’ve written about the importance of investors thinking about their influence on the policy formation process. Central to our recent report “What can investors do about climate change” is the idea that investors need to think of themselves as influencers and reinforcers within a complex system rather than drivers of the climate transition. As I mentioned at the conference, investors have long acted to try to improve the market's ability to generate sustainable returns: the push for shareholder rights and governance reforms from the late 1990s onwards being one example.

Yet I feel uncomfortable about the growing enthusiasm for "System Level Investing". With the dawning (and welcome) realisation that the "forceful governance" paradigm of responsible investing hasn't really worked, there’s a risk that system level investing becomes The Next Big Thing with a similar disregard for constraints, realistic limitations, and boundaries of legitimacy.

System Level Investing opens up a potentially unlimited range of issues for investor action. If XYZ issue is bad for society it must be bad for investment returns over the long-enough term.Therefore, We Must Act Now! So the risk is that the concept becomes a convenient horse to which to attach any favoured ESG wagon. The problem is that the list of topics (inequality, diversity, human rights, just transition, environmental protection) often reads uncomfortably like a "progressive" left-of-centre political agenda.

Indeed, we know we're losing the plot when System Level Investors, in the name of reducing the "systemic risk" of inequality, seek to push UK supermarkets into paying higher wages as they are swallowing the triple whammy of increased minimum wage, higher employer's NI and a new workers' rights bill. At the same time as ignoring that we have a successful political process, with cross-party endorsement and supported by the Low Pay Commission, for deciding how high and how fast the minimum wage can be pushed, balancing against employment and economic growth.

Why on earth do investors claim to know better? The arguments framed - that somehow higher pay will be automatically repaid with improved productivity and higher retention, or will lead to healthier economic growth and hence returns on the market as a whole - are so extraordinarily simplistic as to immediately undermine the whole concept. (To see my more reasoned arguments see here, here, and here).

This is just one example. But we really need to get much more serious about our analysis or we will be accused of virtue signalling or of twisting the System Level Investing concept to meet a political world view.

Any asset owner reaching for the System Level Investing justification needs to very carefully consider and document their reasoning against four criteria:

• Does the issue being addressed have a plausible (come on, be honest now) connection with long-term portfolio values? Not everything that is bad for society is bad for markets. Not every ESG issue is financially material. Not every progressive cause is addressing a systemic risk.

• Do investors plausibly have the expertise, capability, and agency to make any difference to the issue? Investors’ ability to influence what companies do is pretty constrained, and even if they succeed any impact is often offset at the system level. This is why the concept of policy advocacy is rising up the agenda, but as we discussed in our work on investor climate action this channel also faces some very challenging constraints and limitations.

• Given the likely efficacy, is this a good use of the asset owner’s resources compared with other things they could be doing for their beneficiaries? Asset owners also need to ensure the action isn’t exposing the beneficiaries to risks in the case it’s unsuccessful (e.g. through a distorted investment strategy).

• Do investors have legitimacy to act on the issue? In situations where the financial case is, let’s politely say, ambiguous, they need a clear mandate from beneficiaries. These days it’s dangerous to assume we know what our beneficiaries want or to assume they all want the same thing. In cases where there is a clear political process for dealing with complex trade-offs (as in the case of UK minimum wages) investors need to ask why anyone should listen to them.

These conditions don’t reduce the available set of System Level Investing issues to zero. Indeed I’ve argued myself that climate change and nature loss in particular are two issues where it makes sense for investors to lean in. But they do constrain it and they do influence how investors should approach the issues they decide to take on.

Investing is not an ethics-free zone. But we need to subject System Level Investing to hard-headed analysis in light of fiduciary duty, investor agency, and mandates and to clearly document our reasoning to withstand potentially aggressive future scrutiny.

Woolly thinking about the case for, and appropriate nature of, investor stewardship action on ESG issues got the industry into hot water in the past, sometimes justifiably.

Let’s not make the same mistake again.

---