This is particularly important in the context of building wealth for the long term.
For example, a company’s activities – the products or services it provides, the capital and labour used in its supply chain, its energy consumption and carbon emissions – both affect and are affected by its stakeholders and the environment it operates in.
Societal norms, stakeholder expectations and customer preferences all influence a company’s activities.
Environmental impacts from a firm’s operations, or external impacts from the environment on a firm, create risks and opportunities for value creation that manifest over different time horizons. In short, there are spill-overs across different parts of the ecosystem and over time.
A holistic approach to sustainability recognises these spill-overs and seeks to integrate them in investment analysis. This type of thinking is additive and complementary to traditional investment theory. It does not require a rejection of foundational concepts.
Incorporating sustainability requires senior leadership vision and ownership, and firm-wide commitments supported by a collaborative organisational culture.
Investment leaders looking to advance the sustainability transition would do well to focus on ESG education, structure teams with access to sustainability expertise, ensure they apply systems-level thinking to the mindset of investing, and invest in IT architecture to efficiently incorporate sustainability data and analytics into the investment process.
The investment industry is evolving toward a more purposeful form of capitalism, in which sustainability considerations are embedded throughout the investment process.
By embracing systems thinking, the investment profession can orient itself to ensure both long-term and sustainable wealth for clients.
Rhodri Preece, is senior head, industry research, at the CFA Institute