Reframing Finance
Five Lessons from System Shifters: Lesson Four
It’s impossible to shift systems - the purpose they serve, the power they exert, the way they deploy resources - without shifting the systems that finance them. System innovation and financial innovation go hand in hand. To bring new systems to life system shifters need to inject resources into and release resources from systems to remake them.
Shifting a system requires investment, usually on a significant scale. But it is not just a matter of the quantity. System shifters do something more qualitative and in a way more powerful. They reframe how resources flow into, through and out of systems, for example from linear to circular; extractive to regenerative; exploitative to mutual.
Indeed, a determined band of innovators is doing precisely that, often working in overlooked niches on the fringes of the world’s broiling financial system: devising ways for finance to play a creative role in bringing to life the more inclusive, balanced and regenerative systems we need to secure our future.
On day four of our Learning Festival ‘Making The System Shift’ we brought together some of these innovators to share their ambitions and insights. The good news: more investors recognise they should be investing in systems change. What they need is simpler, practical, models to bring together different kinds of capital to enable bigger, deeper change to happen more quickly.
The players in this nascent movement of system shifting investors come from many sources. There are philanthropists, such as the Paul Ramsey Foundation in Australia; a new generation of social impact investors, such as SecondMuse, who see entrepreneurs as agents of system change; community developers and wealth builders, like the Centre for Community Investment, who are mobilising capital around community development priorities; and architects of sustainable transitions, such as Commonland, which is just one example of how to bring together social, economic and ecological regeneration in a shared landscape.
Three lessons stood out from this discussion among innovators.
Opportunity First
There’s a huge opportunity to invest in the systems society needs for a sustainable, inclusive and regenerative future. It’s not a cost; it's an opportunity. But it needs to be seen in terms of whole systems rather than discrete companies, products, services and technologies.
The most fundamental task is to bring together system shifting innovators and system shifting investors to enable what Johan Schot of the Deep Transitions Research Project described as “a fundamental re-ordering of society.” That means shifting the focus from squeezing financial returns from current systems, while ameliorating harms, to investing in the creation of alternative systems. Philipp Essl from Big Society Capital said its system innovation work has increasingly been organised around creating entirely new systems, markets and industries. Ben Gales from the Paul Ramsey Foundation talked about the role philanthropy could play in supporting demonstrators of future possible systems.
Distinctive Values
Innovative investors are developing more effective ways to assert an alternative set of values, to provide finance with a sense of purpose and direction which goes beyond maximising profits and shareholder value. That implies a different kind of investment process, one that puts social values in the driving seat.
Robin Hacke from the Centre for Community Investing described how the Centre works with disinvested communities to establish ambitious community priorities - for example to increase social housing - before turning those into a set of “investable propositions” for investors. The community’s priorities come first, the investment follows.
Jeff Cyr, from Raven Indigenous Capital, explained how developing an ecosystem of indigenous entrepreneurs made the fund more attractive to mainstream investors because it stood for distinctive values and value propositions, rooted in indigenous values of long term mutual interdependence.
Complementary Advantage
System innovation requires investors to collaborate over quite long periods in which a new system first emerges, runs into teething problems, overcomes obstacles and eventually matures. Different kinds of investors play a role in these stages, from philanthropists, to venture capitalists in the early stages, to governments and pension funds in the latter stages. The creation of new systems for food, mobility, energy, care, health and wellbeing will involve investments by many players being blended, layered and sequenced.
Steve Waddell from Bounce Beyond and Catalyst 2030 shared a framework for different investors to see more clearly the complementary roles they play in “ecosystems for financing transformation.” Willemijn de longh’s work with Commonland enables communities, businesses and investors of all kinds to come together around a shared vision to “revitalize communities and regenerate landscapes” in tandem.
Practical Next Steps
Sustainable development is within reach; it’s not a utopian dream. But it would require a financial system organised to create a transformational shift to an economy that is socially and ecologically restorative and regenerative. It is not impossible to imagine what such an economy might look like; it is much harder to imagine how the shift can be made given the financial system’s profit making priorities. Making these innovative practices commonplace will require investors to play new roles, and to follow different processes.
Roles
Investors will have to change their sense of identity and purpose: to look for opportunities to collaborate in a process of unfolding change rather than being profit hungry and calculating. For example Ingrid Burkett from the Yunus Centre at Griffith University imagined a future in which there would be “careholders” stewarding assets and communities, rather than “shareholders” with a narrow focus on dividends and returns.
Processes
The way investment decisions are made and who makes them has to change. Sabina Curatolo from Bridges Australia explained how it had created a more diverse, inclusive investment portfolio, increasing investments in minority and women owned businesses, by changing how investments were identified, screened and supported.
System shifting requires long term commitment. Joe Nelson of Sealaska, who helps guide indigenous led investment to strengthen the people, culture, and homelands of the Tlingit, Haida and Tsimshian communities in what is now referred to as Southeast Alaska, talked about the transformational effect of imposing a 100-year time frame on investment decisions. The fund asks questions like: will this investment make it more likely that our grandchildren’s children will be able to grow up in a vibrant local culture, supported by a sustainable economy that is part of a healthy ecology?
Too often it seems the price of capital is that it calls the shots, insisting on maximising financial returns. The soft, hidden power of finance stems from the way it locks up our imaginations: we cannot see an alternative.
The alternative to a financial system which is in command, is a financial system which is one partner in long term social and economic change. Our innovators are charting a shift from a system in which financial capital is the master, to one in which it is the servant of a more sustainable future.
Read more about the financial innovations outlined here and the emerging field of systems investing in our new paper “The Path to a Preferable Future: Investing in System Innovation” here.
