Revolutionizing Impact: The Power of Systems Change Investing

Systems Change Investing is about changing how the entire system functions, so that it can produce long-term positive outcomes.

What is Systems Change?

Systems change addresses the root causes of social issues to bring about sustainable, impactful change. Unlike traditional approaches that might focus on individual problems or symptoms, systems change requires a holistic view and an understanding of how various elements interact within a system. This approach often involves diverse stakeholders, including policymakers, organisations, communities, and individuals. It demands not only explicit structural change but also addressing power dynamics, mental models (how people think), and other less tangible factors.[1] By applying a systems lens to complex problems, the dynamics of the surrounding system can be mapped to explore the ways in which the relationships between systems components affect its functioning, and ascertain which interventions can lead to better results.[2]

Source: Catalyst 2030. New allies: How governments can unlock the potential of social entrepreneurs for the common good, p.10 [3]

Systems Change Investing

Unlike traditional impact investing, or Sustainable/Responsible Investing (SRI), which focuses on outputs, Systems Change Investing (SCI) focuses on outcomes. While outputs are the tangible results of a process, outcomes may be difficult to observe and measure. Outcomes have multiple complex intertwined dependencies. It is also possible that certain outputs have (positive or negative) effects on multiple desired outcomes.

To achieve the desired outcome, we would need to examine the root causes of the issue (e.g., social inequality between men and women) and act accordingly. Investments in technology would need to be made alongside investments in community ownership, government regulation, support for NGOs and academia, public awareness campaigns, and collaboration efforts among all parties. SCI is about changing how the entire system functions, so that it can produce long-term positive outcomes. Investment can foster, nurture and scale up alternative ways of structuring our societies.[4]

Source: Unleashing the power of capital, Deep Transitions Lab. [5]

Transformative investment in systems change has the potential to help uncover (and even create) new investment opportunities in overlooked areas with high transformative potential. It can also help diversify against profound systemic risk,[6] which presents an opportunity for asset owners and fund managers. Systemic risks that are not easily captured within conventional investment and risk management frameworks share certain characteristics, such as:

1.     A long time horizon with widespread, sometimes global, impacts

2.     Lack of accepted standards for measurement

3.     Potential for adverse impact on

-       Ability of long-term investors to achieve their objectives and/or

-       Economic stability of the funding entity

The World Economic Forum Global Risk Report highlights six of the most significant systemic risks faced by the world today and maps their interconnectedness. It concludes that transformative investment can convert these systemic risks into sustainable returns.

Source: Transformational Investment: Converting Global Systemic Risks into Sustainable Returns, World Economic Forum. [7]

Systems Change Investing (SCI) can strongly drive system change, in the same way that Sustainable/Responsible Investing (SRI) successfully drove corporate sustainability over the past 20 years.[8]

Evaluating Systems Change

Nearly all 𝗦𝗥𝗜 funds, corporate sustainability strategies and Sustainable Development Goals (SDG) efforts are focused on addressing symptoms (environmental, social, economic) and encouraging companies to voluntarily reduce negative impacts. 𝗦𝗖𝗜 involves rating companies on system change performance, and then using the ratings to develop investment funds. Examples of 𝗦𝗖𝗜 𝗺𝗲𝘁𝗿𝗶𝗰 𝗰𝗮𝘁𝗲𝗴𝗼𝗿𝗶𝗲𝘀 include system change strategies, public awareness and media campaigns, system change collaboration, government influence activities, addressing specific system flaws, and supporting NGOs, academia and other groups that are promoting system change.[9]

It's important to look at impact metrics, but avoid a narrow focus by maintaining a systems outlook. Jessica Davies and Madeline Goldie of Social Finance suggest regularly questioning assumptions and monitoring for changes in underlying values, as well as in relationships between the various components of the system. Any number of factors might affect a metric or an outcome. They also propose treating your strategy as a hypothesis and pivoting as you learn and take note of changes, while keeping  sight of your North Star (see graphic below).

Source: Navigating System Change Evaluation, Social Finance. [10]

Sources:

[1] https://www.tsiconsultancy.com/blog/systems-change/

[2] https://oecd-opsi.org/guide/systems-change/

[3] https://catalyst2030.net/resources/new-allies-report/

[4] https://assets-global.website-files.com/632d6cde6052c1b591d8dcbc/6374ee1afd7e6086262118d9_QG_16-11-22_NC.pdf

[5] https://www.transformativeinvestment.net/transformative-investment-3

[6] https://assets-global.website-files.com/632d6cde6052c1b591d8dcbc/6374ee1afd7e6086262118d9_QG_16-11-22_NC.pdf

[7] https://www3.weforum.org/docs/WEF_Transformational_Investment_2020.pdf

[8] https://globalsystemchange.com/system-change-investing-a-whole-system-approach/

[9] https://www.greenbiz.com/article/system-change-investing-business-case

[10] https://www.socialfinance.org.uk/insights/navigating-system-change-evaluation

[11] https://www.rockpa.org/case-study-b-lab/