Systemic Investing for Social Change

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In the face of complex social and environmental challenges, our best efforts often only address a symptom, rather than root causes, even as unintended consequences create new problems. For this reason, a growing number of people, across multiple sectors, are bringing a systems lens to societal change. The philanthropic sector has been increasingly implementing a systems perspective and approach, as seen in work such as Rockefeller Philanthropy Advisors’ Shifting Systems Initiative. Parallel efforts are being employed by multilateral institutions, including UNDP’s work on funding portfolios. Yet in the investment world, systems thinking is only beginning to gain traction. Investors who think about social change tend to be rooted in a linear, reductionist form of logic. One expression of this is what we call the “single-asset paradigm” of impact investing: the idea that a single technology, project, or enterprise can bring about structural change in society. The single-asset perspective can be effective in appraising individual deals and exploiting specific opportunities for both impact and financial return, but it sits at odds with what is required to seed genuine transformation.

Systemic investing is a nascent investment logic that seeks to step up to the challenge of working in complexity. Starting with seeking to understand the actors, interconnections, and dynamics in any given context, it asks what is the real nature of change that is desired and/or demanded, and then determines how financial capital might be allocated to enable such change. In this way, systemic investing invites us to reimagine and evolve how impact investment—and finance more broadly—could work. It forces us to think beyond the efficacy of any one investment—be that a project, program, asset, or venture—and recognize that if we wish to shape and shift systems, we will need to resource multiple actions in concurrent, coherent, and adaptive ways.

Current approaches by investors tackling social and environmental challenges tend to significantly underestimate what is required to move past the multiple crises facing humanity and shift the inertia of the status quo. This new investment logic is a different way of framing and understanding the nature of the change needed: not only increasing the amount of capital available to address systemic issues, but also considering how investment capital is deployed alongside other forms of financial and non-financial capital. Because of the integrated nature of environmental and social change, we need a much broader network of actors working to address priority issues, and to weave their efforts together in more aligned and complementary ways. As a result, systemic investing seeks to utilize financial capital as both resource and connective tissue.

The TransCap Initiative has defined systemic investing as: “the application of systems thinking and complex systems science to understanding societal problems and addressing them through the strategic deployment of diverse forms of financial capital nested within a broader systems change program for the purpose of transforming human and natural systems.” Put simply, it is an investment logic that serves the primary purpose of fostering systems change in both form and function.

Variations on this idea are gaining traction in different contexts and geographies, but we are yet to see a consolidated conversation. Through this article, therefore, we aim to provide some introductory framing around the essential attributes of systemic investing. We also wish to bring clarity to what it isn’t, as it is important to prevent core concepts from being diluted, generalized, or co-opted before their potential is properly explored.

A Different View of How Change Happens

At the heart of the systemic investment logic is a different way of framing and understanding the nature of change needed to respond to the most persistent and pressing challenges.

For the investment community at present, challenges are most often engaged with as if they are “complicated” rather than “complex,” to use a distinction from the Cynefin framework. As Rob Ricigliano analogizes, the difference is between clocks and clouds: with the right technical skills, a clock can be taken apart, and its components and their interaction understood. This is because a clock, while complicated, behaves in a predictable manner. A cloud displays none of these attributes, because its complexity is a product of the dynamic elements and environment that created it. A “clock approach” to change is therefore to “solve problems, fix what’s broken, and get it done as quickly as we can.” But while this can be an appropriate response in some circumstances, it isn’t a good fit for complexity. And yet, prevailing investment logics largely amount to bringing clock-type approaches to cloud-type challenges.

Take, for example, impact measurement and management (IMM), the main way in which impact investing differentiates itself from conventional investing activity. IMM relies on investors identifying metrics that capture impact and then using those metrics to inform investment decision-making. This focus on specific outcomes replicates conventional thinking with respect to measuring performance, but it fails to appreciate complexity. Similarly, while deal flow approaches are an efficient way to source and narrow down possible investments, they are based on appraising individual prospects against predetermined criteria. As such, they don’t allow for the analysis of relationships between activities, actors, and assets, and how they might affect each other with respect to a shared goal and the wider context they exist within.

Put simply, clock-based approaches make sense in situations they were designed for but they are mismatched for the work of systems change.

What Could Systemic Investing Look Like in Practice?

In 2009, Betsy and Jesse Fink initiated a program of investment to tackle the challenge of food waste in the United States, combining philanthropic grants, direct investments in startups, and formation of the ReFED backbone organization. As a recent MIT Sloan case study about this effort reveals, millions of dollars from the Finks catalyzed billions of annual investment into a web of complementary solutions.

This went way beyond attracting good “deal flow”, and involved convening cross-sector actors to share information and resources, generating new data and insights into how food waste was being generated across the entire food value chain, mobilizing different types of financial capital into promising and joined-up solutions, and harnessing collective intelligence and action to encourage evolution of the food system.

A more recent example of where there is demand for systemic investing is Regen Melbourne’s “Swimmable Birrarung River” challenge. Regen Melbourne describes itself as a platform for ambitious collaboration in service to Greater Melbourne, and “Swimmable Birrarung” is one of their initiatives. It sets a bold goal that is accessible and tangible in its framing, but which will require significant structural and systemic change to realise. Making the river “swimmable” (fundamentally improving its water quality and changing any number of relationships that five million people have with it) will involve cross-sector cooperation and many interconnected actions being undertaken in concert. It will also demand resources from across the entire capital spectrum.

Regen Melbourne is in the process of exploring how systemic investing could enable and amplify this mobilization. To do this, they are facilitating engagement between stakeholders, mapping resource and value flows, surfacing and interpreting resourcing needs/opportunities, and starting to build a picture of an interconnected investment landscape. At the same time, they are testing the openness of capital-holders to systemic investing and asking what would be required to enable changes in their respective policies and practices. For the investors, this will mean going beyond their conventional processes, cooperating with a range of actors, and potentially being involved in the development of new financing vehicles.

How Is the Field Evolving?

The volume of activity combining investment and finance with systems thinking is growing. For example, The Investment Integration Project is making the case for “system level investing,” a term that is also used by The PreDistribution Initiative. Systemiq and others talk about “System Change Investing,” while philanthropic funders (like Ashoka) talk about “funding systems change.” The Transformative Finance Lab at EVPA, FEST, and Metabolic talk about “transformative finance,” where transformation is inherently linked to systems change. Impact Frontiers has recently published guidance for investors on using systems mapping techniques and a School of System Change in Finance has recently been launched by Aviva and Forum for the Future. The TWIST network has formed to foster peer learning and best practice sharing among investors for systems change.

There are, however, just as many examples of “systems” language being used in investment with no real indication that things are being done differently, what we might call “systems washing” or “systems mouthsets.” As Blomkomp, Snow, and Burkett recently put it:

“The language of co-design and systems change is becoming so ubiquitous — everyone is either asking for it or claiming to be doing it. But what do systems and co-design approaches really ask of us? And how do we work in ways which honour this in our work?”

We make this point to make the case for critical discernment. Systemic investing, as we see it, requires mindsets, principles, practices, and infrastructures that are distinct from status quo funding and financing. For this reason, we define it as a specific and overarching logic, rather than a loose description of approach. That is, a new logic for investment is a more substantial undertaking, grounded in a thorough and genuine attempt to recognize complexity and harness relationships between actors, activities, and assets. Once we understand systemic investing in this manner, it becomes easier to discern where systems language is being used in a potentially transformative manner—where it signals a new investment logic—and where it is a sign of only minor adjustments to how things are done.

Building the field of systemic investing therefore requires elaborating on what this new investment logic consists of, starting with its core attributes and components.

Core Attributes and Components

To avoid the dilution of ideas that offer the potential for real change, we place a set of clear attributes and components at the heart of systemic investing. We suggest these attributes and components need to be present, but without prescribing exactly how they are combined. Think of it like a band composing a piece of music. There are certain elements needed to create a distinctive “sound” (in the way the Beatles have a “sound” that can be easily recognized), but the way those elements are combined varies enormously from one track to the next. If systemic investing is the “sound,” then each attempt to transform a system is one of the songs.

Here, we group the core attributes and components in four categories and expand on them in turn:

1. Guiding principles.
2. Actors from multiple domains.
3. Objects and infrastructures.
4. Modes of operation.

Guiding Principles

Systemic investing is grounded in a systems view of the world, and requires a particular mindset and way of being, expressed through the following principles:

• Adopt a systems lens. This work demands that the nature of the world is seen as interconnected, contingent, and ever-changing. A systems lens focuses on both objects and the relationships between them, and this tracks to all levels of scale. This principle also extends to how individuals see themselves in relation to change. Transformation is both an outward and inward process, and this requires an openness to learning, a willingness to listen to other perspectives, and empathy that means checking ego at the door.

• Be open to different understandings of success. Conventional understandings of investment success need to be left at the door, both to avoid fixed expectations regarding returns and outcomes, and to open minds as to who sets the change agenda and what counts as “good practice” in investment.
• Have respect for complexity. Simple answers are often a sign of oversimplification. Systemic investing recognizes the messiness of complexity and works with the constraints it creates, particularly in terms of what is knowable. Simple impact metrics, for example, are unhelpful if they create a false impression of causality and ignore the web of relationships that contribute to any given change. A relational view also has implications for modes of operation, including how portfolios are formed (to generate multipliers and spill-overs), how cooperation is fostered between actors, the importance of learning, and the need for adaptive strategies.
• Deprivilege finance. Finance plays a vital role in systems transformation, but only as one element among many. This principle entails searching for ways to put capital to good, complementary use, and understanding its interdependence with other actors and inputs. Systemic investing should not be dominated by the needs and preferences of individual capital-holders. Indeed, many systemic challenges may require a softening or reversal of normal power dynamics that privilege asset owners.
• Focus on the real economy. Building on the previous point, systemic investing takes real economy systems as the starting point, asking how finance can help shift and heal systems that meet the needs of people within the boundaries of the planet. These needs are often anchored in place and are articulated through shared transformative goals by people in those places (such as a swimmable Birrarung River). This approach sits in contrast to many sustainable finance initiatives, which start with the needs and interests of the financial system, and seek to create behavior change that will lead to changes in capital allocation.

Actors From Multiple Domains

Systemic investing involves multiple kinds of actors working together like a musical ensemble, often in combinations that have not occurred before. Capital holders are accustomed to working with capital users, but the nature of system change requires recognition of a broader range of actors, outside their usual domains of operation: foundations, NGOs, governments, and academics, to name a few. One way of understanding this broadening out is to recognize the multiple forms of capital that different agents bring. Systemic investing brings the holders of different types of financial capital together with other forms of capital: social, cultural, and political capital, for example.

Objects and Infrastructures

The statements, agreements, data assets, frameworks, contracts, and mechanisms that give shape and substance to the work. They include:

• A transformative intent or goal - an explicit and shared articulation of the change being aimed for, the “north star.”
• Systems mapping and analysis, with identification of key actors, relationships, feedback loops, and leverage points for change.
• A transformative theory of change and/or a directional strategy, shared by actors to guide decisions and action, and continuously updated over time.
• Frameworks for enabling cooperation, coordination, and coherence between multiple actors, including governance arrangements that define decision-making processes and controls.
• Fit-for-purpose funding vehicles capable of holding capital that can be deployed systemically, for example, by enabling investment in a range of actors, activities, and assets, across different asset classes, ticket sizes, risk profiles, and time horizons. This will likely include a mixture of commercial and non-commercial interventions.
• A definable organizing function (potentially a dedicated and specialized entity) that helps coordinate stakeholders and the work. Like the rhythm section in a jazz band, this function keeps pushing the work forward, injecting energy and counteracting the entropy that tends to steadily pull actors back into their siloed ways of operating.

These objects and infrastructures are created and adopted (and often owned) by multiple actors.

Modes of Operation

Finally, there are the modes of operation:

• Taking a realistic amount of time to foster cooperation and partnerships across different sectors and types of actors.
• The deployment of multiple forms of capital in pursuit of the shared goals, often supported by ways to better account for multiple forms of value creation and blended value flows.
• Formation of strategic portfolios designed to harness relationships, combinatorial effects, and spillovers between activities, actors, and assets.
• A focus on sensing, measuring, and learning with respect to how investments and interventions are generating change, aligning with the theory of change, affecting each other, and influencing the systems context, more broadly.
• An adaptive approach that enables strategy to be fluid, responding to emergence and changing circumstances.

These attributes and components interact and reinforce one another. The guiding principles foster shared reference points and help ensure the different actors are bringing compatible mindsets to the work. This provides the foundation for modes of operation that are suited to creating the objects and infrastructures. Crucially, there is considerable flexibility in how these attributes are combined and how they are applied to an intervention context. Different types of actors, for example, will take on different roles according to the needs of their particular context. In some settings, capital-holders will lead; in others intermediaries, public entities, and/or self-organizing alliances will take the initiative.

Conclusion

We recognize that systemic investing, as defined by the core attributes and components we’ve outlined, is difficult to implement under the financial industry’s current modes of operation. However, our intention is to convey a vision of what it would mean to enact this investment logic, even if aspects are untested or out of reach.

In our own prototypes and projects, we seek to bring at least some of the ingredients of systemic investing into play. Our intention is to use these core attributes and components as a north star, while being open and transparent about the compromises we decide to make as we work to implement these ideas in practice. By articulating this vision, we can hold emerging work up to a standard, guide critical explorations, and highlight the priority areas for development. To further advance the field of systemic investing, we need prototyping, research, and community building. Our respective organizations (TransCap Initiative, the Griffith Centre for Systems Innovation, and the MIT Sloan Sustainability Initiative), will be joining with others in pursuing these objectives.

Ultimately, in trying to define this new investment logic, we are striving for transformative, rather than incremental, change. This does not mean we are dismissive of attempts to bring about more incremental change. For much of the investment world, incremental changes are currently the only realistic avenue. However, we should not allow ourselves to think that incremental change will be enough; we must strive for a form of investing that serves the process of transformation, with the purpose of realizing safe and just futures.

Read more stories by Jess Daggers, Alex Hannant & Jason Jay.