Systemic Investing: moving money in service to life

To drive systems change, our investment logic needs to also have a theory of change that is aligned with the reality of how change actually happens in the real, complex and messy world.

min read
Kaj Lofgren
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Our Context

There is now consensus amongst scientists and economic leaders that urgent change is required to safeguard our planet for human civilisation. From the sustainable development goals, to the planetary boundaries framework and the COP process, there is global agreement for change. However, progress towards meaningful change at the magnitude required is limited, with emissions rising, natural disasters increasing and inequality accelerating. Social and economic change that rises to the scale of our current challenges is elusive in the context of systemic inertia and the forces of status quo economics.

The United Nations identifies finance as a critical success factor for the fulfilment of the Sustainable Development Goals. Similarly, the Paris Agreement names finance as one of three essential strategies for reaching our climate goals. It is agreed that capital is a critical lever in driving positive change and addressing our global challenges. In response to this context there have been countless “sustainable finance” and impact investing initiatives in Australia and around the world. In fact, many people reading this will have been part of these initiatives. It is clear that our challenge is not a desire for change.

Instead, the problem is there is a mismatch between (a) acknowledging the urgent need to deploy finance in service of transformation and (b) the amount and quality of money flowing towards genuinely systemic action.

Wide-sweeping systems change is essential to address wicked challenges such as climate change and social inequality.  However, our financial and investment systems (even those with a sustainable or impact focus)  are geared to simple linear relationships between investments and outcomes, costs and benefits. Hence capital deployment is often limited to treating symptoms rather than solving for deep-rooted causes. As our friends at TransCap Initiative note, “the paradigms, structures, and practices of today’s financial sector prevent it from unleashing deep, structural change in the real economy.”

As such, the focus on simply increasing the quantity of capital into the “impact space” is only one half of the challenge. The other half is interrogating the quality of capital and shifting the finance paradigm and investment logic away from incrementalism and single-point solutions and towards systemic transformation.  

Ultimately, our current financial paradigm is blind to the quality and magnitude of risks we face, and is equally blind to the transformational opportunity that lies in structuring system-level value. Money is not flowing in service to life. We need new approaches.

Systemic Investing: a new investment logic, a new paradigm

A growing group of researchers and practitioners around the world are exploring what an investment logic looks like that serves the primary purpose of systems change. This begins with the simple but critical understanding of a system as a complex set of interrelated elements that are working together to produce an outcome. A system could be a community, an organisation, an economic sector, a city or a country. Systems change therefore refers to a deliberate effort to alter the way a system acts, with the goal of achieving a preferable outcome. Acting with a systems lens involves both a different mindset and approach, alongside a suite of tools that allow for understanding and influencing a system.

Systemic investing is an investment logic which sits at the intersection between systems thinking and finance.

To drive systems change, our investment logic needs to also have a theory of change that is aligned with the reality of how change actually happens in the real, complex and messy world. The traditional investment logic treats the world as complicated - like a machine to be optimised. This logic assumes parts fit together in an efficient order, can be controlled, separated and optimised in isolation to improve the overall functioning of the machine. This ‘machine’ paradigm at best creates slower and less effective responses and at worst is dangerous and counter-productive for society when we implement strategies for change.  This is because the world is complex, not complicated. Complexity recognises an ever-changing set of conditions, dynamic flows between inputs and outputs and intangible relationships that shape connections between parts of our systems.  

The traditional finance paradigm based on optimising an economic machine has been incredibly powerful in driving towards its intended goal: profits and growth. Unfortunately this goal has led to multiple interconnecting crises. In order to shift towards the goal of a safe, resilient, robust and just future, we need a financial paradigm that recognises the full complexity of our natural and human systems. This includes understanding the nature of interconnectedness, the power of positive and negative feedback loops, going beyond direct effects and towards multi-order impact, and appreciating and taking responsibility for externalities.

In practice, systemic investing requires funding architecture: the emergent design of networked capital organised to achieve a complex goal. This is only possible through deep partnerships between diverse capital holders and collectives of change-makers. However, our current funding tools of deal structuring, term sheets and narrow impact reporting creates separation, entrenches power and most critically crushes the creative potential of emergence. The traditional investment paradigm fails to recognise that systems exhibit novel and non-linear behaviours that are not predictable from the sum of their individual parts. As the famous R. Buckminster Fuller quote recognises, “there is nothing in a caterpillar that tells you it will be a butterfly”. The traditional finance paradigm demands certainty and simplicity over the real world reality of emergence and complexity. As a result we have an impact landscape full of inspiring caterpillars and very few butterflies.

Funding architecture connects investors and philanthropists with those who can actively shape real world change, aligns these actors around a systemic theory of change and most importantly, ensures that all are ready and willing to work together to achieve the goal together. This approach harnesses the self-organising value that emerges and embraces the power of the unexpected, rather than remaining constrained by fixed mindsets and short term, linear and first order measures of progress. As systems investor Danny Almagor (CEO and co-founder of Small Giants) notes, “systemic investors think about nurturing the forest, not betting on which tree will be the tallest.”

Impact Investing was a revolution for traditional finance when it emerged 15 years ago. The idea of aligning finance with purpose was a big step in the right direction. But it was only a step. Our global crises are now increasingly existential. In this context, it’s time for another great leap. By combining global thought leadership in systems thinking and complexity, with purpose-led finance, we can begin to truly understand the purpose of capital: to serve life in all its forms.

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