Almost exactly a year ago, I attended the first-ever London Climate Action Week. Back then, progress towards establishing consistent international standards for green finance and sustainable investment was the main talk, but as Extinction Rebellion gained notoriety in and around the event, I commented at the time:
“As far as milestones go, I would place higher odds on 2019 being remembered as the year when Extinction Rebellion, Greta Thunberg and young people wrested the climate agenda away from the outgoing generation of leaders and forced “net zero” policies onto the agenda with greater urgency.”
One year on, “net zero” has made its way onto the agenda of this year’s London Climate Action Week (an entirely online event because of COVID-19), along with innovations in green and “blue” finance (ocean conservation) and best practice examples in the (still lagging) field of climate change adaptation.
But again, I find myself looking for what could be the next “net zero” sustainable development theme to break into the climate finance conference circuit and more importantly into mainstream policy and finance circles.
This exploration is how I stumbled into the growing global development conversation on system change, which I believe now stands on the cusp of catalysing a similar agenda shift in how we arrange the funding of sustainable development. I would wager that the theme of system change, either in earnest or at least in name, will become a headline topic in sustainable finance forums in the months to come.
System change: “wicked problems”, leverage and ripple effects
In the maturing parlance of system change, the most intractable unintended consequences generated by our way of life are commonly labelled “wicked problems”: climate change, plastic pollution, homelessness, institutional bias against certain groups of people (the glass ceiling for women at work, systemic racism, etc.).
In an inspiring blog post, Dominic Hoffstetter, the head of EU-Climate KIC’s Transformation Capital Initiative (and one of the most cutting edge practitioners of system change applied to funding sustainability) illustrates the problem-solving perspective of a system change proponent by outlining his (unsolicited!) recommendations to Amazon founder and multibillionaire Jeff Bezos on where to spend the USD 10 billion he has earmarked to tackle climate change. Where can this money be spent for the greatest ripple effect?
Rather than focusing on symptoms (ploughing ever more money into more renewable energy farms to cut carbon emissions, say), the system change perspective identifies potential leverage points to facilitate the “emergence” (another common system change term) of a different state of affairs which undoes the very conditions underpining why these problems persist (a less energy-intensive economy, for instance).
Mr Hoffstetter recommends that the Bezos Earth Fund (i) focus on the USA, still the world’s biggest polluter per capita and capable of global influence, (ii) fund the creation of social innovation hubs (places where people from various backgrounds can be empowered to collaborate and design solutions to “wicked problems”), (iii) lobby for green legislation and (iv) fund the arts to inspire people with visions of, and ultimately, demands for a greener future.
Intentionally or not, investors change systems. As impact investors become more accountable for their assets, they have the opportunity to engage with other stakeholders who have not historically been involved in the investment process.Excerpt from the Impact Investing Handbook, by Steven Godeke & Patrick Briaud (Rockefeller Philanthropy Advisors, July 2020)
Rooted in the principles of system thinking as first explored by academics including the late American MIT professor Donella Meadows whose contributions were compiled in the seminal book “Thinking in Systems: A Primer”, the concept of system change has gone from being an academic field of study to permeating into mainstream conversation and practice in a number of disciplines especially concerned with sustainability including city government, urban development, international development, public policy innovation.
And now, it is being discussed in matters of funding and corporate sustainability.
After first being explored by pioneering philanthropic donors and social enterprise supporters such as Ashoka, experimentation with system change has steadily expanded into development finance agencies (Sweden’s Sida, the UK’s DFID, EU Climate-KIC, etc.) and has finally begun to trickle into mainstream business and finance circles.
Global consumer goods company Unilever has made it the cornerstone of its corporate sustainability approach, while Rockefeller Philanthropy Advisors, one of the pioneers of impact investing has acknowledged system change as an overarching perspective in the recently published update to its impact investing handbook.
It feels like it is only a matter of time before sustainable finance circles take an interest in this – and in its radical ramifications.
Funding both apples and pears: thinking in clusters
One of the most vexing issues is the mental model of the project as the unit of analysis and of transaction: (…) the solar farm, the windfarm. If we just get people to move from project to portfolios (…) and how they can think about doing maybe ten projects together in strategic alignment, that would be a major breakthrough.Dominic Hoffstetter – Director of Capital & Investments, EU Climate-KIC (“Funding systems change” – a webinar hosted by Systems Innovation, 15 April 2020)
How to finance such a holistic approach to solving sustainable development problems is a fast-rising priority topic for the actors engaged in this global conversation on system change.
Applying a system change perspective can be a way to frame with greater clarity the kind of silo-breaking collaboration that the world of development finance has long been calling for. It offers principles to map out what I had in previous blog posts described as “clusters of impact” – the reverberations (or externalities) of an investment across the wider socio-economic system.
And herein lies one of the essential problems with funding such clusters: finance remains heavily siloed, whether sector-focused (e.g. water, power, infrastructure, etc.), product focused (e.g. project finance, PPP, equity investment, etc.) or mandate-bound (e.g. climate finance, philanthropy, development finance), with too few bridges in between. Blended finance and venture philanthropy are some of the more obvious attempts to build these connections, though their mandate is limited by their ultimate focus on commercial activities.
A further funding problem which I had not contemplated previously is what Dominic Hoffstetter describes as the continued dominance of the singular project (a windfarm, a business, an advocacy campaign, etc.) as unit of reference for financing, as opposed to portfolios (or indeed clusters) of a variety of projects, all working in sync to contribute to the emergence of a desired system change.
Orchestrating a portfolio of activities across commercial and non-commercial activities towards system change requires the collaboration of a variety of funders and funding instruments – new bedfellows for a new kind of relationship.
Revisiting old writing
Recasting an eye on my earlier writing, I realise that I had in many respects (though imperfectly) intuited the need for, and challenges of funding system change.
On the need for novel forms of collaboration, in June 2019 I wrote about the need for business to imagine a new way of conducting “origination” (i.e. business development, in investment banker slang):
“the future of origination seems to be shifting from a matchmaking exercise to the smart design of consortia framed by the targeted impacts of a financial or economic endeavour.”
Three months later, I dug further into this idea and what it could mean for funding strategies: that forming partnerships for interlinked goals would require “rightsizing” for complexity; that funding would involve systematically monetising “clusters of impacts” where feasible and desirable. I summarised the dynamic relationships between these trends into five key trade-offs for financing – some old, some new, all interconnected.
When applying a system change lens to my past writing about the five trade-offs, I have been inspired to make at least two changes, namely (i) changing the focus of one trade-off away from merely monetising impacts to the funding of a portfolio of activities (monetisable or not); and (ii) accounting for an additional sixth trade-off: the scale of intention, from narrow commercial interest to purposeful investment to system change.
The goal of my next blog post will be to revisit the financing trade-offs I wrote about in September 2019 with greater clarity.
Notwithstanding this, I remain as convinced as I was last year that development and mission-led finance are rapidly moving past the once-ubiquitous call for a greater number of “bankable” projects to coax commercial investors into funding their programmes. Such a binary cash flow-led approach is blind to the systems and externalities within which these investments are embedded and that they in turn influence.
At a time when tackling wicked problems requires a more collaborative way of tying together various activities to be funded, “bankability” (and by extension the “investibility” of sustainable investments) is increasingly being recognised as only one part of a larger whole in funding the advent of a more sustainable world.