The systems on which the long-term value of our investments depend are clearly under strain, yet political pressure and public backlash have made collective, decisive action harder for many institutional investors.
On 5 May, Arkadiko Partners hosted its biannual Peer Network meeting, held under the Chatham House rule to encourage candid dialogue between leading asset owners and asset managers on sustainability, stewardship and long-term wealth creation. Participants were drawn from current and former clients and Arkadiko’s wider network.
The session asked a direct question: what practical actions can investors take, individually and collectively, on the obstacles and opportunities of systems-level stewardship? This note summarises the matters discussed and offers some practical actions.
WHAT SYSTEMS-LEVEL INVESTING MEANS
Systems-level investing moves beyond traditional practice to address the systemic risks that ordinary diversification cannot reach. It recognises that:
- The individual elements of an investor’s total portfolio interact, so each holding is best judged by its contribution to the whole-portfolio outcome rather than in isolation. This total portfolio approach, treats the portfolio as a single system shaped by the interplay of its parts and by the markets in which they sit; and
- The health of the market as a whole (beta) accounts for between 75% and 94% of portfolio returns; security selection and portfolio construction (alpha) drives only the remaining 6% to 25% (Lukomnik and Hawley, 2021).
Systems-level stewardship works to shape the market-wide norms, standards and policies that drive issuer behaviour across the system, rather than concentrating ownership effort on raising the value of individual companies. It also seeks to minimise the externalisation of costs by companies that would damage the overall health of the systems on which the value of our collective investments depends.
LIMITATIONS OF MODERN PORTFOLIO THEORY
When Harry Markowitz developed Modern Portfolio Theory (MPT) in the 1950s, it was a landmark: a portfolio of uncorrelated assets is less risky than any single holding, giving investors a rigorous basis for diversification. Its limitation is just as consequential. MPT accepts non-diversifiable risk as a given, offering no defence against systemic threats such as climate instability, inequality, geopolitical strain, the governance of technology and the erosion of institutional trust. By treating beta as fixed, it effectively tells investors to ignore the dominant driver of their returns. Systems-level investing answers this by working to improve the market in which all assets operate, rather than competing for alpha within it. Lukomnik and Burckart’s recent handbook sets out how investors can do so in practice (2026).
SYSTEMIC RISK IS PRESENT RISK
A common misconception is that these risks are real but remote. However, systemic risks are impairing portfolios now: wildfires, floods and extreme weather are already causing permanent capital loss. The damage can be incremental enough to pass unnoticed, but it can compound into something substantial.
Such risks are categorised as “long-term” partly because of how investment performance is measured. Since they hit all market participants at once, they are absorbed into the benchmark, so a manager measured against it appears unscathed (a version of the “tragedy of the commons”).
THE MEASUREMENT PARADOX
Our industry treats measurement as a precondition for action, which can inhibit systems-level work. Feedback loops, interdependencies and time lags mean the linear frameworks used for conventional investment do not easily transfer. Waiting for perfect measurement, in effect, may be a decision not to act. A more productive path would be to build understanding and momentum, then develop ways to assess contribution over time.
The same tension runs through targets and KPIs. Asset owners worry, rightly, that well-meant metrics reward visible, easily measured activity over the engagement that matters, where success is uncertain and outcomes may take years.
Waiting for perfect measurement, in effect, may be a decision not to act. A more productive path would be to build understanding and momentum, then develop ways to assess contribution over time.
DOUBLE MANDATES
A recurring obstacle is what we term the “double mandate”: the conflicting signals managers receive when a conventional investment management agreement (IMA) points one way and a separate stewardship or sustainability policy points another. Where the two are misaligned, managers must reconcile instructions that encourage long-term action while rewarding short-term behaviour. In substance, the ambiguity is often resolved in favour of the short-term, supported by monetary incentives and measurability.
The cause is structural. Asset owners focused on their beneficiaries’ long-term interests still write mandates that reward short-term performance, which pushes capable managers to encourage the companies they own to externalise costs onto the wider system. It is a pattern of good actors within poor architecture. Recognising stewardship as integral to fiduciary duty, our opportunity is to redesign that architecture by bringing the IMA and stewardship instructions into a single, integrated mandate.
STATING INVESTMENT BELIEFS
A practical tool for advancing systems-level stewardship is the investment beliefs statement: a clear, formally adopted account of what an organisation believes about investment, risk, return and its stewardship responsibilities. It can form part of the investment mandate, guiding the resolution of competing priorities.
Investment beliefs statements are useful because the trade-offs are rarely clean. Addressing a systemic risk can impose short-term costs on a company even when the long-term benefit to the system is clear, while a company that offloads its costs onto the economy may lift its own value yet reduce that of a diversified portfolio. That distinction, between maximising a single holding and maximising the whole portfolio, is both underappreciated and fundamental to systems-level stewardship. A beliefs statement provides a means of navigating these tensions.
POWER AND ALIGNMENT
Where the stewardship function sits within a firm determines how much it can achieve; participants were clear it needs both power and alignment. Power means taking part in investment decisions rather than being consulted afterwards and sitting at executive level rather than in a function that is easily overruled. Alignment means stewardship is built into those decisions, since a team cut off from investment practice will struggle to matter, however well-resourced. Asset managers’ influence with companies derives from their clients and the capital they represent; firms that sideline stewardship risk squandering the very influence that gives it meaning.
Power means taking part in investment decisions rather than being consulted afterwards and sitting at executive level rather than in a function that is easily overruled.
PRACTICAL ACTIONS
Several concrete actions emerged from the discussion:
-
Integrate the mandate so managers are aligned with their clients’ longer term priorities, rather than incentivised for short-term actions.
-
Develop a statement of investment beliefs as a reference point for resolving conflicts and trade-offs.
-
Act ahead of perfect measurement: build knowledge and momentum in the present and assess contribution over the longer term.
-
Design targets that reward meaningful engagement and outcomes rather than easily measured process and activity.
-
Enable outcomes through power and alignment: ground stewardship in investment decisions, with executive support; integrate it fully into investment practice.
-
Treat systemic risk as present: a current driver of returns, rather than a distant concern.
CONCLUSION
Systems-level investing is still evolving, despite or perhaps because of the geo-political headwinds and it is genuinely hard to implement. It asks investors to do things most were not trained for and to engage with problems that neither resolve on a neat timeline nor conform to conventional measurement.
As Lukomnik suggests, the question is whether investors can afford to ignore systemic risks and their role in relation to these. Without serious engagement from those with both the scale and the incentive to act, capital markets are unlikely to generate the prosperity on which long-term investment depends.
REFERENCES
Lukomnik, J. and Hawley, J.P. (2021) Moving Beyond Modern Portfolio Theory: Investing That Matters. Abingdon: Routledge.
Lukomnik, J. and Burckart, W. (2026) The Handbook of System-Level Investing: How Experts Worth Trillions of Dollars Are Rethinking Investing. Miniver Press.