Transformation capital: A new investment logic for catalysing systems change

In its 2018 special report on the impacts of global warming of 1.5°C, the Intergovernmental Panel on Climate Change (IPCC) called for the “rapid and unprecedented” transformation of the “socio-technical” systems that constitute modern human civilisation: Energy, agriculture, infrastructure, industry, and cities. This is a stark reminder that the world is not on track to avoid the most perilous impacts of a warming planet. What lies ahead is unparalleled in ambition and difficulty.

The way money flows and accumulates through the different parts of our economy will determine whether we can reduce greenhouse gas emissions and become climate-resilient in line with the Paris Agreement. However, today’s financial industry is ill-suited to fuelling the type of real-economy transformation the IPCC is calling for. This is also true for investment approaches branded as “sustainable finance” such as environmental, social and governance (ESG), triple bottom line investing (TBLI), socially responsible investing (SRI), or impact investing.

This is why we invited more than 50 systems thinkers, innovation practitioners, investment professionals, and creative voices during this month’s first-ever London Climate Action Week to design a new investment logic capable of catalysing systems transformation. The workshop helped us refine our understanding of the limitations of present-day capital markets and sharpen the contours around the building blocks of a systems-transformative investment logic.

The key to transformative investing is to recognise that the world at large—and the socio-technical systems nestled within it—behaves as a complex adaptive system. Such a system is constantly evolving but impossible to predict, and it therefore often behaves in a non-linear fashion.

In viewing the world through this lens, it becomes apparent that the finance industry’s single asset paradigm—one stock, one bond or one project—will never be able to unleash transformative effects. A more promising approach is to construct portfolios for strategic synergies, selecting individual assets not based on their individual merit but based on how they reinforce the portfolio’s potential to unlock transformative dynamics.

Take the electrification of transportation. Investors usually take bets on single investment propositions—an electric vehicle start-up, a manufacturer of charging infrastructure, a developer of fleet management software, or an installer of household-level power generation and storage systems.

By taking a systems approach and investing in all stages of the electric transportation value chain—for instance, through the strategic blending of different instruments and asset classes—investors can significantly increase the likelihood that a market for electric transportation will emerge. All that is needed is for asset owners and managers to abandon their siloed mindsets and structures, eliminating categorisation where possible.

However, economies are not just made up of technologies and businesses but also of people and institutions. To catalyse systems transformation, it is necessary to engage all levers of change in the system, including policy and regulatory frameworks, social norms and behaviours, skills and capabilities, individual and collective narratives, and production and consumption paradigms. Many of these interventions are non-investable under the traditional investment logic—but they create value for society at large. So systemic investors should align themselves deeply with actors interested in promoting public goods, such as governments, philanthropists, and multilateral institutions.

That still leaves the question of what to spend money on. Not all interventions in a system—whether investable or not—have the same potential to unleash transformative effects. This is why it is critical to identify sensitive intervention points—those places in the system where a relatively small change can trigger outsize effects and where non-linear feedbacks can act as amplifiers. Often, it will not be apparent where to act first, so the initial positions will represent a hypothesis. Investors must therefore be competent in observing the system and making sense of what emerges within it so that they can dynamically allocate capital to where the desired transition dynamics take hold.

Systemic investing relies on a multitude of additional concepts and capabilities. It requires that we map systems, hypothesise transition pathways, and design transformation strategies. It also means that we need to re-conceptualise risk and return, away from the self-referential paradigm of capital accumulation toward a coupling with the success and uncertainties of catalysing transformational dynamics. We can operationalise these concepts through new business models, adapted financial instruments, and innovative public-private investment partnerships.

EIT Climate-KIC has set out to develop and test these elements with its community of innovators. We believe that deploying capital for the transformative change that the IPCC is calling for requires that we re-imagine the role of capital in promoting a prosperous, sustainable, and inclusive society. This does not imply overthrowing capitalism, revolutionising the monetary system, or disregarding the interests and fiduciary obligations of asset owners. Much can be achieved by simply deploying capital in a smarter way and on a bigger playing field. If you are a challenge owner, innovation practitioner, and investment professional keen to address the most pressing and tangible problems of our time, we are keen to hear from you.

This article first appeared in Environmental Finance.

 
Location
Related Goal
Goal 10: Mainstream climate in financial markets
Articles you may be interested in
In The News
From start-up to 100-person industry player in 18 months: air up is launching ...

It’s a beverage revolution: Healthy hydration while fooling your...

From start-up to 100-person industry player in 18 months: air up is launching in new markets
In The News
#TurnItAround: an event for all climate solutions seekers, suppliers and enabl...

As part of the fifth SDG Global festival of...

#TurnItAround: an event for all climate solutions seekers, suppliers and enablers
In The News
New EIT initiative to boost innovation in higher education

The European Institute of Innovation and Technology (EIT) is...

New EIT initiative to boost innovation in higher education
In The News
Just transition within reach for Polish coal city Rybnik

“We are preparing plans for the next decade. Mentality is...

Just transition within reach for Polish coal city Rybnik
In The News
Inclusive guide helps communities build urban resilience

The new Urban Action Kit, launched by the International...

Inclusive guide helps communities build urban resilience
In The News
Climate app among DigiEduHack 2020 global finalists

The DigiEduHack, supported by EIT Climate-KIC as well as...

Climate app among DigiEduHack 2020 global finalists
In The News
GreeMko receives Climate Reality Project Award in Spain 

GreeMko (for Green Management Technology), a Spanish start-up that...

GreeMko receives Climate Reality Project Award in Spain 
In The News
What’s the future of trade in a climate crisis?

EIT Climate-KIC Chief Executive Officer Kirsten Dunlop addressed the...

What’s the future of trade in a climate crisis?
In The News
Wanted: Green business ideas to fix climate change

Starting today, the seventh edition of the global green...

Wanted: Green business ideas to fix climate change
In The News
Why sustainable water management needs a systemic solution

Ensuring that fresh water is available, in a sustainable...

Why sustainable water management needs a systemic solution
In The News
Integrating nature with technology to strengthen climate adaptation

The European Commission released the new EU Climate Adaptation...

Integrating nature with technology to strengthen climate adaptation
In The News
EIT Climate-KIC is a key player in helping Europe adapt to climate change

EIT Climate-KIC welcomes the new EU strategy on adaptation...

EIT Climate-KIC is a key player in helping Europe adapt to climate change
In The News
Edinburgh: building climate resilient infrastructure and communities

A labyrinth of cobblestone streets, dimly lit and presided...

Edinburgh: building climate resilient infrastructure and communities
In The News
Residents of Kessel-Lo, Belgium, are invited to shape the future of their neig...

EIT Climate-KIC is working with the city of Leuven...

Residents of Kessel-Lo, Belgium, are invited to shape the future of their neighbourhood
In The News
Improved urban parks increase communities’ climate resilience

Start Park, a project led by citizens from Florence,...

Improved urban parks increase communities’ climate resilience
In The News
New accelerator programme geared towards systemic change secures key partners

Following its Open Call, the New Accelerator programme has...

New accelerator programme geared towards systemic change secures key partners
In The News
New videogame builds climate awareness among players

Change Game, a videogame financed by EIT Climate-KIC and...

New videogame builds climate awareness among players
In The News
Organic and homemade food brought to the dining rooms of large corporations

Carlota Mateos and Juan Vila, co-founders of PlenEat have...

Organic and homemade food brought to the dining rooms of large corporations
In The News
Climeworks added to Microsoft’s climate portfolio

EIT Climate-KIC supported Climeworks, a carbon capture technology, is...

Climeworks added to Microsoft’s climate portfolio
In The News
Circular Slovenia named in 100 Climate Policy Breakthroughs

The peer-to-peer learning platform for governments, Apolitical, included EIT...

Circular Slovenia named in 100 Climate Policy Breakthroughs
In The News
New tool uses satellite imagery to accelerate sustainable agriculture

Supported by EIT Climate-KIC and developed by its partner...

New tool uses satellite imagery to accelerate sustainable agriculture
In The News
EIT Climate-KIC at the Climate Adaptation Summit 2021

EIT Climate-KIC will be taking part in the Climate...

EIT Climate-KIC at the Climate Adaptation Summit 2021
In The News
Green Invest from Stuttgart and Start Park from Florence win Climathon Awards ...

A total of 140 teams of citizen finalists applied...

Green Invest from Stuttgart and Start Park from Florence win Climathon Awards 2020
In The News
Biden’s Opportunity for Reinventing Climate Innovation

Joe Biden will be sworn in today as 46th...

Biden’s Opportunity for Reinventing Climate Innovation
In The News
EIT Climate-KIC’s Open Accelerator: collaboration, not competition

It is no secret that to tackle climate change...

EIT Climate-KIC’s Open Accelerator: collaboration, not competition
In The News
New platform inspires sustainable Nordic wood construction

This week marks the launch of NoMuWood.com, an EIT...

New platform inspires sustainable Nordic wood construction
In The News
European Union launches Pact to support citizen-led climate action

On Wednesday 16 December, the European Commission is launching...

European Union launches Pact to support citizen-led climate action
In The News
“An avalanche of hope and energy”: The power of Paris

Our Climate Champions 2020: Melissa Capcha. Five years on...

“An avalanche of hope and energy”: The power of Paris
In The News
“Let’s find ways to take action within our abilities”

Our Climate Champions 2020: Gopal Kumar Mohoto. Five years...

“Let’s find ways to take action within our abilities”
In The News
“Climate change is outpacing us, there is no time for excuses”

Our Climate Champions 2020: Cristina Aleixendri Muñoz. Five years...

“Climate change is outpacing us, there is no time for excuses”