Understanding beta activism – What does it mean by “We are all beta activists now”?

Katsuji Imata
President, SIMI

At SIMI Social Impact Day 2025, where the overall theme is ‘Exploring Foundational Shift toward Impact Economy,’ the keynote session on May 14 will feature Jon Lukomnik and James Hawley, authors of “Moving Beyond Modern Portfolio Theory – Investing That Matters” (*1). The main theme is “Beta Activism”. The term may be familiar to those in finance, but what does this mean outside of those directly involved in finance?

The word “activist” may not give many people a favourable impression in Japan. In the investment world, they refer to investors who try to influence corporate governance and management, while in the NGO world, they are actors who make policy statements or demonstrate actions to attract people’s attention in line with the worldview and values they espouse. They are similar in that they urge change in large organisations and society through their own actions, but they tend to be marginalised in Japan where ‘harmony is the greatest of virtues.’ Yet, it seems quite natural to envision that the world is changed through the actions of individual citizens.

However, investors’ traditional “activism,” which ultimately aims to increase the share price of the investee by improving its management, can be viewed as pursuing private interests. This can be called “alpha activism” (*2). On the other hand, the theme of this year’s keynote session is “beta activism”. Both “alpha” and “beta,” which are among the basic jargon in the investment world, are the basis of the discussions that will be developed in this keynote session. So let’s take a look at them:

‘Alpha’: an indicator of how much an investment’s rate of return exceeds the market average (benchmark) rate of return.
‘Beta’: the sensitivity of the rate of return on investment to the market average (benchmark) rate of return. Also called market sensitivity. A beta greater than 1 indicates greater sensitivity to market changes and tends to be higher risk/higher return than a market portfolio. (*3)

In other words, alpha is explained as a measure of how much an individual stock or portfolio return has outperformed its benchmark, while beta is a measure of how sensitive an individual stock or portfolio return is to overall market fluctuations. Simply put, if a fund’s annual return is 10% and the market’s annual return is 3%, this fund’s alpha is 7%. It means that the fund manager has made a return of 7% above the market return. And the source of all this is the Modern Portfolio Theory (MPT), laid out in 1952 by Harry Markowitz, who later also won the Nobel Prize in Economics, and the subsequent Capital Asset Pricing Model (CAPM).

Now we come to Mr Lukomnik and Mr Hawley’s argument. As detailed in their book, and mentioned in the Social Impact Day session, they will introduce the “MPT paradox”, which states that “the market influences your investment, but your investment does not influence the market”. In other words, in MPT, beta is treated as a given.

‘Beta-activism’ poses an objection to this. The argument that individual investment behaviour affects beta, and that this is more so the larger the investment, seems obvious at first glance, but has not been considered as such in the formulations of the investment world. ‘Beta’ is then also referred to as systematic market risk, which is explained as being due to systemic risks of the environmental, social and financial systems.

Systematic risk: non-diversifiable risk to investments (market risk)
Systemic risk (or system risk): the risk to, or arising from, environmental, social or financial systems. (*4)

In their book, Lukomnik and Hawley introduce “beta activism”, which seeks to reduce systematic risks by addressing systemic risks such as climate change, lack of gender, ethnic and racial diversity and the anti-microbial resistance. The message is that market risks, which are the lifeline for investors and corporations, cannot be reduced without building a sustainable and just society, and, if that is the case, the only way is to tackle system-wide risks head-on.

At the Social Impact Day keynote session, they explain: ‘Today’s investors intentionally seek to impact systems’ and ‘Beta activism is often an “on-ramp” to system-level investing.’ Now that the world of finance and investment has come to this realisation, stakeholders who are not directly involved in finance and investment need to echo this realisation, and work together to understand the risks of the system we live in from various perspectives in order to move forward on the “beta-activism” together. The world changes through the actions of individual citizens. Yes, as the authors say: ‘We are all beta activists now’.

(*1) Japanese Translation (2022), Lukomnik, Jon and James Hawley (2021), Moving Beyond Modern Portfolio Theory – Investing That Matters, Routledge.

(*2) Ibid., Commentary by Mr Masahiro Matsuoka, p.228.

(*3) Glossary, The Pension Fund Association (Japan)
（https://www.pfa.or.jp/yogoshu/）

(*4) Lukomnik and Hawley (2021), p.2