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
EIT Climate-KIC’s work in Slovenia

Last November, the Slovenian parliament passed a motion to...

EIT Climate-KIC’s work in Slovenia
In The News
Slovenia adopts EIT Climate-KIC Circular, Regenerative Economies Deep Demonstr...

The Slovenian parliament passed a motion to adopt an...

Slovenia adopts EIT Climate-KIC Circular, Regenerative Economies Deep Demonstration
In our community
Cities in a 1.5 degree world: What is there to learn from Leuven?
Cities in a 1.5 degree world: What is there to learn from Leuven?
In our community
Slovenia adopts EIT Climate-KIC circular economy proposal: Q&A with Kirs...
Slovenia adopts EIT Climate-KIC circular economy proposal: Q&A with Kirsten Dunlop
Innovation Spotlight
Elemental Water Makers’ solar desalination an asset as climate change ...

EIT Climate-KIC supported Elemental Water Makers is a water desalination scale-up that’s transforming water systems by enabling...

Elemental Water Makers’ solar desalination an asset as climate change threatens clean water
Innovation Spotlight
Zolar’s household solar kit is democratising the energy sector

Energy production and consumption are the largest sources of greenhouse gas emissions in the European Union, accounting for 80 per cent...

Zolar’s household solar kit is democratising the energy sector
In our community
Interview with policy and governance innovation experts at Madrid and Basque...
Interview with policy and governance innovation experts at Madrid and Basque Country Universities
In The News
COP25: Measurement and attribution of climate contribution to financiers

With the carbon costs of travel in mind, key...

COP25: Measurement and attribution of climate contribution to financiers
In The News
COP25: Madrid city side event

With the carbon costs of travel in mind, key...

COP25: Madrid city side event
In our community
Interview about Futures Literacy with Riel Miller, Head of Foresight at UNES...
Interview about Futures Literacy with Riel Miller, Head of Foresight at UNESCO
In The News
COP25: Climate leader insights

With the carbon costs of travel in mind, key...

COP25: Climate leader insights
In The News
OpenSurface land-use tracking platform launches at COP25

Pioneering AI, satellite and ground-sourced data technology drives more...

OpenSurface land-use tracking platform launches at COP25
In The News
COP25: Towards the systemic transformation

With the carbon costs of travel in mind, key...

COP25: Towards the systemic transformation
In The News
Helsinki launches Climate Watch to track city’s emission reductions

The City of Helsinki recently launched the ‘Climate Watch’,...

Helsinki launches Climate Watch to track city’s emission reductions
Opinion
Moments matter*
Michelle Zucker Director, Community Activation, EIT Climate-KIC
Moments matter*
In The News
Naked Energy secures €6.17 million in funding

Naked Energy, an EIT Climate-KIC supported solar energy startup...

Naked Energy secures €6.17 million in funding
In The News
First European cluster accelerator programme launched in Frankfurt

How to take clusters to the next level and...

First European cluster accelerator programme launched in Frankfurt
Innovation Spotlight
Ioncell’s fiber innovation could help drive the circular economy transitio...

The textile, garment and fashion industries generate tonnes of pollution each year and recycle very little, which...

Ioncell’s fiber innovation could help drive the circular economy transition
Opinion
The challenge of redesigning venture capital
Dominic Hofstetter Transformation Capital, EIT Climate-KIC
The challenge of redesigning venture capital
In Detail
Clean and Healthy Construction

Insights from the C40 World Mayors Summit in Copenhagen: Master Class and Market Dialogue for Clean and Healthy Construction. Why clean construction? Kevin Austin,...

Clean and Healthy Construction
Opinion
If we have figured out transformation, why is the world still in such a mess?
Susannah Fisher Research, EIT-Climate-KIC
If we have figured out transformation, why is the world still in such a mess?
Opinion
The tyranny of categorisation
Dominic Hofstetter Transformation Capital, EIT Climate-KIC
The tyranny of categorisation
Opinion
EIT Climate-KIC strengthens biodiversity through systems change
Felicity Spors Head of International Affairs, EIT Climate-KIC
EIT Climate-KIC strengthens biodiversity through systems change
Opinion
Why our cities must act as beacons for ambitious climate action
Tom Mitchell Chief Strategy Officer, EIT Climate-KIC
Why our cities must act as beacons for ambitious climate action
In The News
Biggest-ever global hackathon to tackle climate breakdown

Over 100 Climathon events around the world turn grassroots...

Biggest-ever global hackathon to tackle climate breakdown
In The News
Global call for transformative solutions to tackle the climate emergency

EIT Climate-KIC launches Climathon Global Awards and Healthy, Clean...

Global call for transformative solutions to tackle the climate emergency
In The News
EIT Climate-KIC supported crop insurance project acquired by world’s largest...

The insurance sector is well aware of the rising...

EIT Climate-KIC supported crop insurance project acquired by world’s largest re-insurer
In The News
EIT Climate-KIC innovators celebrated at 2019 EIT Awards

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

EIT Climate-KIC innovators celebrated at 2019 EIT Awards
Opinion
Part three: Climate action #NotinNewYork
Andy Kerr Director, UK & Ireland, EIT Climate-KIC
Part three: Climate action #NotinNewYork
In Detail
New EIT Climate-KIC supported report finds digital technologies can vastly a...

As part of the UN Climate Action Summit, the Global Enabling Sustainability Initiative (GeSI) and Deloitte launched a report today, supported by EIT Climate-KIC,...

New EIT Climate-KIC supported report finds digital technologies can vastly accelerate the SDGs