A new measuring effectiveness roadmap helps investors ensure they are moving beyond generating environmental or social impact through individual market transactions and are better aligning with broader system-level goals (e.g., the United Nations Sustainable Development Goals, SDGs). Group action along the same trajectory can better influence system-level change. The measuring effectiveness roadmap helps investors answer the following question: How can I measure whether I, as a long-term institutional investor, have contributed to promoting the long-term wealth-creating potential of the environment, society, or the financial system?
Measuring Effectiveness: Authors and Methodology
The report, Measuring Effectiveness: Roadmap to Assessing System-level and SDG Investing, is authored by William Burckart, Steve Lydenberg and Jessica Ziegler of The Investment Integration Project (TIIP) and was sponsored by the Investor Responsibility Research Center Institute (IRRCi).
A companion document to the report, Measuring Effectiveness: Roadmap to Assessing System-level and SDG Investing—Supplemental Appendices, contains a series of appendices that provide tools and examples for investors, as well as additional context for and information about the concepts discussed.
The Roadmap to Assessing System-level and SDG Investing outlines a three-step process for measuring effectiveness of system-level investing approaches (i.e., assessing their potential for influence). It borrows from lessons learned from impact investment and best practice in the current investment community. It begins by assessing the appropriateness of system-level issues for investor consideration against the criteria of consensus, relevance, effectiveness, and uncertainty and setting measurable goals for influencing systems.
It then proceeds to assessing the potential usefulness and effectiveness of system-level investing tools used to achieve the goals (Step 2).
Finally, the roadmap identifies four foundational characteristics of environment, society, and financial systems that collaborative action by investors can address: adaptability, clarity, connectivity, and directionality. It proposes metrics for measuring effectiveness of investors in influencing these characteristics and, ultimately, for measuring their effectiveness in shifting paradigms and enhancing systems’ wealth-creating potential (Step 3).
Measuring Effectiveness: Key Findings
The hope is that this approach will enable investors to assess their influence in determining changes at the system-level itself and the potential contribution of their efforts and investments.
Ultimately it is through the collective actions of a diverse set of members of the investment community using a variety of tools in differing ways that sufficient leverage can be achieved to exercise influence within today’s complex, global, interconnected systems. The roadmap borrows from lessons learned from the now decade-old impact investment movement and the investment and measurement practices recommended by notable investors and industry thought-leaders, but is primarily based on concepts adapted from systems dynamics thinking.
The four foundational characteristics of environmental, societal and financial systems are described in slightly more detail below. Investor actions which strengthen any of those four characteristics mitigates systemic risk, while investor actions which weaken any of those four will increase systemic risks.
- Adaptability: the environment, society, or the financial system’s ability to adjust to shocks and major disruptions (i.e., high adaptability, or self-regulation, helps systems better adjust to unanticipated external shocks).
- Clarity: the coherence, flow, access to, and transparency of information about and within a system (i.e., information flows among actors and about system components—and their interrelationships— enables investors’ ability to understand their influence and act accordingly).
- Connectivity: the value of a good or service is determined in part by how many people use it. The more it is used, the greater the benefit to the system (i.e., systems so structured have positive feedback loops that increase their health and resilience).
- Directionality: market incentives structured to encourage positive changes in stakeholder behavior (i.e., healthy systems are those in which influential actors enhance positive characteristics and align their actions with the systems’ fundamental goals).
The measuring effectiveness roadmap recommends how long-term investors might assess their system-level investing approaches and measure their effectiveness and influence on system characteristics in three ways:
- Assess system-level issues appropriate for their consideration and establish commensurate influence goals against which to measure progress; that is, assess the consensus, relevance, effectiveness and uncertainty of an issue and determine which characteristics of its commensurate system to aim to influence (e.g., adaptability, clarity, connectivity, or directionality).
- Assess potential usefulness of the tools available to investors for creating system-level influence; assess whether implementation of selected tools is effective; that is, assess usefulness of tools that focus on field building, investment enhancement, and opportunity generation for influencing system characteristics and assess whether tools are being implemented effectively to achieve desired interim outcomes.
- Measure influence on system characteristics; that is, measure whether system-level change is taking place.
Measuring Effectiveness: Webinar
Measuring Effectiveness: Quotables
Explains Jon Lukomnik, IRRCi executive director,
Investors increasingly realize that mitigating systemic risk is far more important to their returns over time than any trading strategy. That is one reason for the groundswell in investor interest in the sustainable development goals. This report suggests how to go beyond aligning investment strategy with the SDGs and how to actually measure an investor’s ability to impact systemic risk issues.
Co-author William Burckart, notes
Central to the findings of this report is that investors now can measure whether individual organizations are using system-level investing strategies in ways that can lead to collaborative action and influence. Ultimately, it is through the collective actions of a diverse set of members of the investment community using a variety of tools in differing ways that sufficient leverage can be achieved to exercise influence within today’s complex, global, interconnected systems.
Measuring the effectiveness of system-level investing is possible; it is the foundation upon which investors can base consistent, system-wide impact over time and protect the ability of their funds to generate returns in the long term. To paraphrase the business management pioneer Peter Drucker, the only way investors will be able to effectively manage the wealth-creating potential of these systems is if they measure their influence on them.
Measuring Effectiveness: Video
Measuring Effectiveness: IRRCi and TIIP
The Investor Responsibility Research Center Institute is a nonprofit research organization that funds academic and practitioner research enabling investors, policymakers, and other stakeholders to make data-driven decisions. IRRCi research covers a wide range of topics of interest to investors, is objective, unbiased, and disseminated widely.
The Investment Integration Project helps institutional investors understand the feedback loops between their investments and the planet’s overarching systems – be they environmental, societal or financial – that make profitable investment opportunities possible. Once this relationship is understood, TIIP provides investors with the tools to help manage the impacts of their investment policies and practices on these systems.