Guido Veul: System-level engagement requires tough decisions
This column was originally written in Dutch. This is an English translation.
By Guido Veul, Director at AF Advisors
Engagement with companies has now become an integral part of sustainable and responsible investment. However, systemic risks such as climate change and biodiversity loss cannot be addressed at company level alone.
Regulations, market standards and government policy all play a part in determining how companies operate. Institutional investors are therefore increasingly turning their attention to policymakers, regulators and other market participants. This broader approach is referred to as ‘system-level engagement’ or ‘systemic engagement’.
Corporate engagement and system-level engagement are complementary in this regard. A company may invest in reducing CO₂ emissions, but at the same time find that further steps are hampered by the lack of a level playing field or adequate CO₂ pricing. In this way, corporate engagement can highlight the need for changes to legislation and regulations.
This approach is becoming increasingly formalised. For instance, the new UK Stewardship Code 2026 explicitly requires institutional investors to pay attention to market-wide and systemic risks. Engagement with policymakers, regulators and standard-setters, such as the International Accounting Standards Board (IASB), is cited as a possible tool in this regard.
The reasoning behind this is clear. Large institutional investors have broadly diversified portfolios and can only mitigate systemic risks to a limited extent through diversification. An investor may sell shares in CO₂-intensive companies, thereby reducing the portfolio’s carbon footprint. However, this does not eliminate the climate risk for the rest of the portfolio.
If everything is a systemic risk
But if investors wish to actively influence systemic risks, a fundamental question arises: which risks justify an engagement policy?
There is no clear-cut boundary between financial and political issues in this regard. Traditional engagement topics, such as better protection for minority shareholders and accounting standards, will rarely be viewed as political activity. The situation is already more sensitive when it comes to climate change, and in the case of biodiversity, AI, health, labour market policy or income inequality, social and political considerations play an even more prominent role and may even conflict with one another.
Ultimately, virtually every major social issue can be linked to economic growth and investment returns. If financial materiality were sufficient to justify system-level engagement, this would result in a virtually unlimited stewardship mandate.
So where exactly do you draw the line?
Views on this vary across the market. Norges Bank Investment Management (NBIM) published a relatively narrow definition last month. NBIM recognises the importance of systemic risks, but argues that many of these require policy measures for the real economy and therefore fall primarily within the remit of governments. For investors, NBIM sees a role primarily in areas that directly affect the proper functioning of financial markets, such as shareholder rights and market integrity.
On the other hand, various UK asset owners are opting for a broader approach, in which climate, nature, technology and social issues also fall under system-level stewardship. The financial relevance of these is usually clear. What is sometimes less well substantiated is why these particular risks are prioritised, why intervention by the investor is appropriate, and how much funding should be made available for this purpose.
Such justification is essential. As system-level engagement becomes more widespread, investors must be able to explain more clearly why they address certain issues and not others. This is essential for securing support from participants and other stakeholders, and for the design of stewardship policy.
The Dutch market does not need to follow NBIM’s narrow definition. Dutch institutional investors have a long tradition of collective engagement and initiatives aimed at policymakers and market standards. A broader approach can fit in well with this, provided that choices are made explicitly and justified.
Financial materiality is a logical starting point, but it is not sufficient. It must also be clear why an issue falls within the mandate and, where relevant, why it aligns with the interests and preferences of participants or other stakeholders.
Furthermore, the ability to exert influence is a key factor. Scale, expertise, local presence and access to policymakers all help determine where an investor can make a difference. Collaboration can enhance that influence and pool expertise. Consequently, not every material systemic risk is automatically a suitable topic for every investor.
Ambition requires resources
Finally, stewardship capacity and budget are limited. A broader ambition therefore requires explicit choices regarding objectives, approach and the allocation of resources. Alignment with corporate engagement is also important here: where can objectives be achieved through companies, where is intervention at the system level necessary, and where do the two reinforce each other? This helps to successfully organise system-level engagement and prevents an increasingly broad, separate agenda from emerging alongside corporate engagement.
System-level engagement can fit well within the mandate of an institutional investor, but a broader ambition requires more focused choices and sound justification for them. The key question is where an investor can deploy its scarce stewardship capacity most effectively within the broad spectrum of systemic risks.