Climate change, inequality, and biodiversity loss are often framed as external challenges. Increasingly, however, long-term institutional investors see them as fundamental drivers of financial outcomes. In this conversation, Jon Lukomnik, a leading voice on system-level investing, and Claudia Kruse, Managing Director RI Strategy & Partnership at APG, discuss how a broader, systems-based perspective is reshaping investment practice.
Published on:
2 June 2026
In brief
• System-level investing looks at how systems affect portfolios, and how portfolios affect those systems.
• Whereas traditional investing often works with clear inputs and outputs, system-level investing involves feedback loops and interdependencies.
• Influencing these larger systems requires a combination of investor action, public policy, and technological development.
Last month, Lukomnik, Adjunct Professor at Columbia University, edited The Handbook of Systems-Level Investing, a practitioner’s guide developed with leading institutional investors worldwide. A practical starting point is to begin with investment beliefs, Lukomnik says. “Not just the content, but the process of defining them. That process helps align the board, the executive team, and the investment organization. System-level investing affects the whole organization, so alignment is critical.”
Many investors would say they already “do ESG.” So where does system-level investing begin?
Jon Lukomnik: “When people say they do ESG, they usually mean ESG integration, which focuses on identifying risks that affect their portfolio. ESG is a logical extension of modern portfolio theory. You want to understand and diversify the risks within your portfolio.
That has worked for decades. But today, the most important risks are no longer inside the portfolio. They are outside it. These are systemic risks affecting environmental, social, and financial systems, which in turn shape capital markets themselves. Diversification is less effective for those types of risks.
System-level investing builds on that. Modern portfolio theory helps you optimize risk and return within markets. But it does not address the health of those markets. System-level investing adds that dimension. It looks at how systems affect your portfolio, and how your portfolio affects those systems.”
If the risks are different, does that also change how investors work in practice?
Jon Lukomnik: “In many cases, the tools stay the same, but the intent changes. Think about security selection, asset allocation, engagement, stewardship, and investment beliefs. Investors already use all of those.
The difference is how you apply them. Traditionally, engagement might focus on capital structure or executive compensation. With a systems lens, you may still do that, but you also look at issues like emissions, living wages, and taxation, because they relate to systemic risks such as climate change and inequality. So it is not about replacing existing tools. It is about using them with a broader purpose.”
That broader purpose seems to require a much better understanding of what you actually hold.
Jon Lukomnik: “Exactly. If you do not know what you own, you cannot understand your impact. If you are holding thousands of securities or simply tracking an index, it becomes very difficult to map your portfolio to systemic risks.
Some investors have therefore reduced the number of holdings in their portfolios. Not because concentration is the goal, but because it makes it possible to understand both risks and impacts more clearly.”
How does that resonate with APG’s current approach?
Claudia Kruse: “It resonates strongly. Our clients have long defined investment beliefs that include responsible investing, and these guide the entire investment process, including how we implement the clients’ mandates and their Responsible Investment Policy. These cover commitments on climate, biodiversity, and impact investing, and are put into practice through a wide range of instruments. It is not only about managing risk, but also about investing in solutions and engaging with standard setters and policymakers.
This is also reflected in our focus on the real economy, for example through infrastructure investments that facilitate the energy transition. The collective understanding of systemic risks is continuously evolving, as is the way we address them as part of investing to generate strong returns for beneficiaries.”
That complexity keeps coming back. What makes a systems approach so challenging in practice?
Jon Lukomnik: “Systems are not linear. In traditional investing, you often work with clear inputs and outputs. Systems involve feedback loops and interdependencies. Take forests as an example. They matter for biodiversity, for carbon emissions, and for agriculture. Improving one part of the system can create trade-offs in another. You have to think in terms of interactions rather than isolated factors.
This also means you cannot take a “set it and forget it” approach. You need to keep learning, measuring, and adjusting as new information comes in.”
So far, we have talked mainly about risk. Where do the opportunities come in?
Jon Lukomnik: “Every systemic risk is also an opportunity. Someone has to solve these challenges, whether it is climate, infrastructure, or inequality. That creates opportunities for investment. Infrastructure is a good example. Markets tend to undervalue long-term cash flows. For long-term investors such as pension funds, that creates attractive opportunities. So the opportunity side is just as important as the risk side.”
What’s your take on the perception that focusing on these issues comes at the expense of returns?
Jon Lukomnik: “I do not believe that it necessarily does. I am not a proponent of sacrificing returns. All investments have an impact, and that impact should be intentional, but not at the expense of financial outcomes. Some of the concern comes from how performance is measured. Results can look very different depending on the time period. For example, excluding fossil fuels may outperform in one phase of the market and underperform in another.
More importantly, the goal of a pension fund is not to beat a benchmark. It is to meet long-term liabilities. The key question is whether investments contribute to that objective over time.”
Can investors influence these larger systems on their own?
Jon Lukomnik: “No. You need a combination of investor action, public policy, and technological development. These elements reinforce each other. There is not enough public funding to address challenges like climate change without private capital. At the same time, investors cannot do it alone either. What they can do is allocate capital and help shape policy.”
Claudia Kruse: “That reflects our experience. In the Netherlands, we operate within a broader stakeholder environment and work closely with all relevant stakeholders, both domestically and internationally. That makes it more natural to take a systems perspective.”
Finally, what remains the biggest challenge?
Jon Lukomnik: “Communication. Investing is complex, and system-level investing is even more complex. Explaining it clearly, especially in a context of public scrutiny, is difficult but essential.”