This study analyzes the tools used by system-level investors in their efforts to meet net-zero goals. It highlights commonalities and examines some investors’ attributes and the tools they use.

The prevailing belief among system-level investors is that the overall health of the environmental, social, and financial systems influences price levels in capital markets, which, in turn, determines the bulk of the variability in returns for investors. System-level investors believe that between 75% and 94% of their investment returns are driven by the overall state of capital markets rather than the specific securities in their portfolios. Unlike traditional investors who focus on security selection to achieve alpha, system-level investors prioritize beta. For them, beta is salient, not silent.

Many system-level investors recognize climate change as a critical systemic risk and have adopted net-zero goals to mitigate its impact.

System-level investors include large pension funds, such as the Healthcare of Ontario Pension Plan, the California State Teachers’ Retirement System, Australian superannuation fund HESTA, the University Pension Plan of Ontario, and Wespath Benefits and Investments, as well as asset managers, such as BNP Paribas Asset Management, and advisers, such as Cambridge Associates. These investors view climate change as a significant systemic risk, according to the study’s authors Jon Lukomnik and William Burckart of Columbia University’s Sustainable Investing Research Initiative. They see it as a threat to the global economy that poses a direct financial threat but that presents opportunities for their portfolios. Recognizing the interconnectedness of financial, environmental, and social systems and capital markets, these investors adopt climate-conscious strategies in an effort to support the transition to a low-carbon economy. Examining those strategies, the authors find certain commonalities among the investors, whether asset owners or asset managers.

Key Takeaways

• Systemic risk awareness: System-level investors recognize climate change and the transition to net zero as systemic risks that directly impact financial performance. They see a clear connection between climate issues and the health of capital markets, driving their proactive engagement in addressing these challenges.
• Fiduciary duty: They view the obligation to address climate change as an integral part of their fiduciary duty. They emphasize that it is not enough to simply decarbonize their portfolios. They consider active participation in reducing climate impacts necessary for fulfilling their responsibilities to beneficiaries.
• Long-term investment horizon: System-level investors often have a long-term focus, enabling them to prioritize sustainable returns over immediate gains. They believe the health of environmental, social, and financial systems is crucial for long-term investment success.
• Adapting investment tools: Traditional institutional investing tools—including asset allocation, manager selection, and stewardship—are adapted for climate-related objectives by system-level investors as they navigate the transition to a net-zero economy.
• Dual approach to climate action: They use both defensive and offensive strategies. Their defensive tactics include engagement with external managers on climate risks, and their offensive strategies focus on investing in sustainable themes, such as renewable energy and efficiency technologies.
• Collaboration and advocacy: These investors are actively advocating for better climate reporting and transparency. They emphasize their role in shaping sustainable practices across industries and in public policy. This collaborative approach helps drive broader systemic change within the capital markets.

Conclusion

The overarching theme for system-level investors is their recognition of the interdependence between capital markets and the broader environmental and social context. They view traditional methods of managing investment risk as insufficient in the face of systemic risks, such as climate change, that can create systematic, nondiversifiable risk in the capital markets. Therefore, they actively engage with external systems to effect meaningful change, recognizing that their responsibilities extend beyond portfolio management to include stewardship of the planet.

By embracing a comprehensive approach to investment that incorporates climate considerations, these investors not only seek to safeguard their returns but also contribute to the creation of a more sustainable and resilient economy. Their efforts reflect a growing consensus that achieving net-zero emissions is essential not just for the health of the planet but also for the long-term viability of capital markets.

The Study’s Authors

Jon Lukomnik, Sustainable Investing Research Initiative, School of International and Public Affairs, Columbia University

William Burckart, Sustainable Investing Research Initiative, School of International and Public Affairs, Columbia University