Outdated Financial Theory Is Failing Us All: What CIOs Must Rethink About Risk, Return, and Resilience

William Burckart

Editor’s Note: This commentary is Part I of a three-part series of essays from this author on the future of institutional investment management.

At The Investment Integration Project, we recently marked our 10th anniversary with our fourth annual symposium and a simple, but urgent, message: The fields of traditional investment, sustainable and impact investing are nearing a tipping point. Progress has been made, but not nearly enough.

After two decades of working at the intersection of finance and systems change, one pattern is clear to me. Despite decades of innovation in data, frameworks and environmental, social and governance analytics, institutional investors are confronting a stark truth: Climate instability, inequality and democratic fragility are not just unresolved—they are accelerating. We can no longer set these issues aside as externalities. They are destabilizers of the very systems on which portfolio performance depends.

The lens through which these risks are viewed often depends on where an investor starts. Sustainable and impact investors have long prioritized social and environmental concerns, while traditional investors—trained in financial materiality—focus on performance. These approaches once seemed divergent, but that divergence is collapsing. Today, systemic risk draws both camps toward a shared conclusion: Healthy systems are essential to long-term value.

A Reckoning for Modern Finance

At our symposium, I underscored an inflection point that has become increasingly difficult to ignore: The tools we’ve inherited—Modern Portfolio Theory, ESG integration and even conventional impact investing strategies—are misaligned with our current reality. As Steve Lydenberg presciently argued more than a decade ago, MPT was built on assumptions of market equilibrium and rationality suited to managing firm-specific volatility but fundamentally inadequate for addressing deep, nonlinear systemic risks.

In his 2011 chapter Beyond Risk: Notes Toward a Responsible Investment Theory in the book “Corporate Governance Failures,” edited by James Hawley, Lydenberg critiqued MPT as a framework that treats financial markets as self-contained, overlooking how social, environmental and political systems underpin long-term financial performance, writing: “MPT is a theory of portfolio management within a financial system assumed to be self-contained. … It has nothing to say about how that system itself is sustained or undermined.”

The theory’s elegant mathematics were and are silent when confronted with cascading system failures. That early insight laid the groundwork for what we now call system-level investing—a framework built not on abstraction, but on the recognition that systemic problems require systemic solutions.

From Tinkering to Transformation

If the urgency is so clear, why aren’t more investors acting on it? In large part, this is due to how the dominant tools—MPT, ESG integration metrics, impact investing KPIs and even standard stewardship practices—were never designed to confront system-level risks and degradation. They optimize portfolio-level outcomes, not system-level resilience.

That’s where system-level investing comes in. Where MPT and ESG integration ask how systems affect the portfolio, system-level investing flips the lens and poses two key questions: How does the portfolio affect systems? More importantly, how can investors actively manage that influence to preserve and enhance the systems their portfolios depend on?

System-level investing recognizes the recursive nature of risk and return. Impacts are not siloed; they are self-reinforcing. Financial materiality is dynamic. Today’s “externalities” drive tomorrow’s market collapses. Walling off environmental and social harms as financially irrelevant is no longer credible.

The Feedback Loop Problem

A significant barrier to adopting system-level investing lies in an insufficient internalization of the role of feedback loops in investing practices. Most investment decisions rely on short-term, backward-looking data—quarterly earnings, ESG ratings and enterprise disclosures. These indicators are legible, but incomplete. They reward symptom management, not solutions to root causes.

In TIIP’s report, “(Re)Calibrating Feedback Loops,” we argue that investors are trapped in loops that ignore how systems evolve. But some are beginning to break out. For instance, the People’s Pension—a large U.K. DC master trust—recently moved 28 billion pounds away from State Street, citing misalignment on climate stewardship. This is not just a divestment—it is a signal of shifting expectations about how asset managers must engage with systemic risk.

System-level investing calls for longer, wider loops—ones that track and inform regulatory change, market norms and public goods.

Defining System-Level Investing—Clearly

TIIP coined the term system-level investing in 2015 to describe an enhanced operating system for investors. It helps investors: understand the reciprocal relationship between portfolio performance and system health; influence the structures and norms shaping environmental, social and financial systems; and integrate systems-aware decisionmaking across all asset classes and strategies.

This is not an extension of ESG integration or impact investing. It is a fundamentally different approach grounded in fiduciary duty, long-termism and strategic realism. It asks:

• Have your investment approaches shifted how markets function?
• Did those approaches change regulatory expectations?
• Did your voice catalyze peers to act differently? and
• Are you accelerating positive tipping points in system health?

Influence is how systems change. And institutional investors have more of it than they realize.

In Part II, I will explore why getting the definitions right matters—how system-level investing differs from other frameworks that may sound similar but operate with different ambitions, and why this clarity is essential for institutional investors seeking to act decisively in a time of compounding systemic risk.

William Burckart is the CEO of The Investment Integration Project, an adjunct professor of international and public affairs and the Brandmeyer Fellow for Impact and Sustainable Investing at the School of International and Public Affairs at Columbia University, and a fellow with the High Meadows Institute.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS STOXX or its affiliates.

Tags: Climate Risk, ESG, Impact Investing, Institutional Investing, Modern Portfolio Theory, sustainable investing, system-level investing