Episode 15: System Level Investing

In this episode, Matt Orsagh and Nawar Alsaadi of ED4S sit down with Jon Lukomnik, a leading figure in sustainable finance and co-author of Moving Beyond Modern Portfolio Theory. Jonn explores the limitations of Modern Portfolio Theory (MPT) in addressing long-term, systemic risks like climate change, highlighting the evolution toward "system-level investing."
Key Takeaways:
Limitations of MPT:
MPT is designed for idiosyncratic risk (individual asset variance) but fails to account for systemic risks, which cannot be diversified away. Lukomnik notes that while MPT focuses on market-relative risk, it overlooks larger economic and environmental factors that affect the entire market.
System-Level Investing:
Lukomnik advocates for a shift towards system-level investing, where investors engage in strategies to mitigate systemic risks like climate change, inequality, and biodiversity loss. This approach involves collaborative stewardship and policy engagement to reduce overall portfolio risk.
Collaboration and Collective Action:
Collaborative efforts, such as Climate Action 100+, enhance the impact of investors on global issues. Though the free-rider problem exists, Lukomnik observes that collective initiatives are crucial in addressing systemic challenges.
Practical Approaches:
Practical tools for system-level investors include investment enhancements (e.g., climate-aligned private equity and infrastructure projects), stewardship, policy advocacy, and setting clear boundaries for ESG targets. Engaging with policymakers and stakeholders strengthens the collective response to systemic risks.
The Role of Policy:
Effective systemic risk mitigation requires a synergy between investors, policy, and NGOs. Policy is critical in shaping sustainable practices, yet investor engagement and capital flow remain vital in driving actionable change.