It has long been recognized that changing systems requires systems orchestration. Such orchestration often needs an entity to act as the “glue” or connective tissue — what we call backbone organizations.

Typically, backbone organizations convene, coordinate, translate, and advocate. What they usually don’t do — for instance, because they lack the necessary knowledge, network, and compliance infrastructure — is engage investment capital and other sources of finance.

Likewise, many financial players such as asset managers, impact investors, banks, foundations, corporations, and governments understand how to deploy whatever pot of money they control into whatever kind of asset they are mandated to invest in. What they typically don’t do — for instance, because they don’t know how or because they operate with a business model that doesn’t allow them to — is convene, coordinate, translate, and advocate.

So in the ecosystem of systems change, nobody is situated in the nexus of systems orchestration and finance, playing the role of “financial backbone”. As a result, systems change efforts typically lack strategic intelligence and coordination related to capital deployment.

In this article, we posit that such a role is critical for driving transformative change in the socio-technical systems that matter most for the prosperity of humans and nature, such as energy, mobility, food, and industry. We will call this role “strategic capital facilitation (SCF)” and explain what we mean by it and how it could be operationalized.

How do we know something is amiss?

In our practical work on systemic investing — particularly our prototypes in mobility and food systems — we have noticed a set of patterns that point to the lack of fundamental knowledge and activity indispensable for systems work:

• Few are performing the analytical work to understand where a specific system is today, where it needs to go, how it could get there, and what all of this means for the deployment of purpose-driven capital. As a consequence, investors tend to have a poor grasp of a system’s financing needs, of how much capital and of what kind might be required to transform a specific city, transportation system, or food supply chain.
• Efforts to orchestrate different providers of different kinds of financial capital in long-term coalitions — that is, beyond a single transaction or investment facility — are remarkably scarce.
• Many are quick to suggest launching a new fund as the best solution to a financing challenge and equally quick to conclude later that there are “not enough projects.” So investors tend to work within existing market structures rather than contributing to the development of such structures where that’s necessary.

These patterns are problematic because catalyzing systems change through capital deployment requires an insight-driven, collaborative, and long-term approach.

Why is that?

The central challenge in funding systems transformation

Our axiomatic starting point is the notion that systems change rarely results from a single technology, project, company, or social enterprise. Instead, it emerges from a confluence of multiple developments occurring within a system simultaneously and with a high degree of shared directionality.

These developments might encompass new technologies, business models, and pieces of physical or digital infrastructure — the typical targets of traditional investors. But they could also include areas typically not on an investor’s radar, such as policies and regulations, shifts in social norms and values, innovative educational formats, and changes in institutions and governance frameworks.

Each of these developments results from an individual intervention, and each intervention tends to have its own specific financing requirement. Some are perfectly investible with market-rate investment capital, perhaps with a pinch of concessional capital for de-risking purposes. Others require grants from foundations or subsidies and tax incentives from governments. Still others depend on new insurance products, supply chain finance or advanced market commitments from corporations, or income from carbon credits.

Funding systems transformation thus boils down to a two-pronged orchestration challenge. The first is about systemic intelligence generation: figuring out what interventions to finance. The second is about capital matchmaking: channeling the appropriate kind of capital to the right kind of intervention at the optimal time.

Both of these challenges can only be overcome with the right amount and quality of systemic insight, with a sustained collaborative effort involving multiple types of capital providers and other key stakeholders in the system, and with a long-term system-centric investment mandate.

In the current sustainable finance ecosystem, there is nobody with a mandate to generate such insights and coordinate such investor coalitions over time.

Why traditional actors in sustainable finance are poorly positioned to fund systems transformation

We believe there are six principal reasons why strategic capital facilitation is largely absent from systems change efforts, each a reflection of how propose-driven investors tend to operate today.

Issue 1: Capital-centric strategy

Most capital allocators start with a particular pool of capital and look to deploy it in a way that maximizes the pool’s interest, whatever that may be. Investors of market-rate investment capital look for ways to maximize financial return within a specific risk bucket. Foundations look to maximize the societal impact of their grants. Governments spending taxpayer money look for activities and projects with the best cost-benefit ratios.

A typical scenario would be for an asset manager to start out with a specific amount of a particular kind of capital, e.g. a $200 million venture capital fund. But what often remains unstated is whether venture capital is the right kind of capital or whether $200 million can move the needle or only represents a drop in the ocean in a particular system of interest.

So capital allocators typically scan the landscape of opportunities through the (relatively narrow) filters of their own specific capital pools. In other words, they all look for the type of nails made for the specific hammers they wield, which may not correspond to what the transformation of a specific system actually calls for.

Issue 2: Single-asset approach

For reasons we explain exhaustively in the TransCap white paper, most capital allocators deploy capital one transaction at a time: into a single company, single technology, or single project, meaning they assess impact potential on a single-asset basis.

This is antithetical to the starting point stated above, i.e. that systems change is rarely the result of individual assets but most likely emerges from the combined effects of interventions. By extension, evaluation of success or failure should sit at the level of whole portfolios (or at least clusters of assets), not at the level of individual transactions.

Issue 3: Systemic silos

Most investors, even those with a stated ambition of changing systems, operate within a narrow set of sub-spaces of a system — particular sectors, technology types, risk buckets, or geographies. Few see the full extent of the system and have the strategic intelligence about what changing that system would look like and what this means for capital allocation.

What are the ways in which a future vision of that system could express itself? What does a set of coherent theories of transformation and intervention strategies look like? What are the financing needs for each of these intervention strategies? Your typical investor usually can’t answer these questions.

Issue 4: Impact tunnel vision

Most capital pools operate with highly specific interests, which often translate into highly specific impact objectives. The most common manifestations of this are investment funds that target a particular set of Sustainable Development Goals. This specificity drives what we call “impact tunnel vision” (an extension of the more commonly known carbon tunnel vision): narrowly focusing on a specific driver of societal outcomes in a way that leads to the disregard of the interconnectedness with — and interdependency on — other drivers.

Impact tunnel vision is problematic for two reasons. First, it narrows a capital allocator’s scan of investible opportunities in a way that may not be conducive to triggering transformative effects. Second, it tends to introduce a bias for interventions with quantifiable impact, discounting or deprioritizing those that might be equally or more impactful but whose impact may be harder to measure.

Issue 5: Product mindset

Investors are practical creatures — they want to make deals, not spend their days philosophizing, theorizing, or building enabling conditions for deal-making. So an investor’s energy tends to flow into three general activities:

• raising money for investment funds,
• deploying capital out of such investment funds, and
• maximizing the value of investments made.

What reinforces this modus operandi is the business model of asset management. Investors are typically paid out of a combination of income streams tied to the amount of assets under management (AuM) or the number of transactions completed, e.g., in the form of management fees, carried interests, or brokerage commissions. So they are incentivized to launch products and make deals.

In sustainable finance, launching a new fund has become the default strategy for closing capital gaps, irrespective of whether new funds are, in fact, capable of closing capital gaps in the way required. What if a problem calls for the creation of market infrastructure, new regulatory frameworks, or investor coalitions instead? What if building platforms, tools, or narratives would be more catalytic in mobilizing capital? Investors tend not to see it within their identity, capacity, capability, or mandate to deliver answers to these questions.

Issue 6: Diversification

In all of investment land, diversification is a dominant strategic imperative, one anchored both in conventional wisdom (“Don’t put all your eggs in one basket!”) and financial mathematics (Modern Portfolio Theory). It’s this imperative that steers investors away from the sort of concentrated, intense attention that deep systems work requires.

This is not to say that systemic investing calls on investors to put all their eggs in one basket. They can remain diversified across asset classes, and even within their systems change allocation, they can deploy capital into multiple uncorrelated systems.

But what it does mean is that traditional (purpose-driven) investors tend not to have it in their DNA to sustain a deep and focused interest in a particular system over many years. So there is as much a cultural as an operational and financial disconnect between the dispersed interests of traditional capital allocators and those on-the-ground systems orchestrators who live and breathe a specific place, ecosystem, or supply chain.

Ramifications

These six issues have critical implications for our ability to deploy financial capital for systems-transformative effects:

• Misallocation of capital: Capital-centric, systemically siloed strategies can lead to resources being misallocated (from the standpoint of a systems change agenda), flowing into areas that may already be overfunded and/or don’t represent root causes or leverage points.
• Loss of impact: The narrow approaches to capital deployment created by the single-asset approach and impact tunnel vision almost certainly “leave impact on the table” as they fail to leverage the combined effects of strategic, integrated, system-wide portfolios.
• Short-termism: Product mindset and the diversification imperative tend to confine action to investible opportunities that already exist, as opposed to nurturing the long-term development of market structures and project pipelines.

So what’s the solution?

Toward a structural solution for financial systems orchestration

Because the six issues described above are structural in nature, we need a structural solution to address them. By “structural” we mean something that is not an incremental improvement of an existing approach — think, a fancier hammer in the form of new kinds of investment funds — which, in some way, is where the sustainable finance effort is currently stuck. We mean something that is more fundamentally different, like a new element in the sustainable finance infrastructure.

What our experimental work has started to point us to is that what’s missing is a new role that we call “strategic capital facilitation.”

Definition

We define strategic capital facilitation (SCF) as the role in the systems change ensemble whose purpose is to mobilize and orchestrate capital flows within specific socio-technical systems to catalyze their sustainability transformation.

Purpose

SCF should enable the effective and efficient allocation of a multitude of different kinds of capital from a multitude of sources to a multitude of destinations, guided by a theory of transformation for particular socio-technical systems.

SCF should embody many of the hallmarks of systemic investing. Particularly, it should be…

• system-centric: starting with the needs of a socio-technical system and its stakeholders and “working backward” to the financial world
• portfolio-based: directed toward portfolios composed and managed in a strategic way, based on the notion that systems change is the result of combinatorial effects among assets
• intelligence-led: using systems analytics to identify financing needs, bottlenecks, and leverage points to guide capital allocation decisions
• holistically motivated: designing an approach to intervening in the system which is built on an understanding of the interconnectedness and interdependence of all its elements
• capacity-building: developing the enabling conditions (knowledge, market structures, relationships) for financial capital to flow — in time — in self-organized and self-sustaining ways.

This last point warrants elaboration. Capital markets are powerful agents of change, where they function well and are bounded by the right guardrails. In many contexts, however, such markets don’t exist, for example for environmental conservation and climate adaptation.

SCF could thus play a role in creating these markets, e.g. by generating demonstration effects (through model transactions), building investment coalitions, developing financial markets infrastructures (incl. new vehicles), and advocating for regulatory change. Over time, the emergence of such markets could gradually diminish the need for strategic capital facilitation, effectively creating off-ramps for organizations playing the SCF role.

Activities

The main purpose of SCF is to ensure that the right kinds of capital flow to the right kinds of interventions in the right way and at the right time as part of a coherent and integrated funding architecture. To enable this, SCF should take a lead role in:

• Defining or moderating the multi-stakeholder process that leads to transformative intent in a specific socio-technical system in a way that is democratically legitimate
• Designing — and possibly structuring, capitalizing, and governing — multi-capital systemic investment programs
• Conducting systems analysis to understand system financing needs and capital allocation priorities, creating theories of transformation, and developing intervention strategies
• Building coalitions of capital providers, including private-sector intermediaries (banks, asset managers), asset owners (private-wealth owners, family offices, pension funds, sovereign wealth funds), public-sector organizations (governments, development finance institutions, multilateral development banks), and insurance companies
• Building and operating a learning and sensemaking infrastructure that continuously updates the coalition’s strategic intelligence about the system’s state and its capital needs
• Mobilizing capital from different sources and — possibly — playing an intermediation role
• Enabling the emergence of self-organizing, self-catalyzing investment markets, e.g. through innovation work, training, and political advocacy

Operating contexts

SCFs can operate in a range of different contexts. Through our work on the future of mobility and food in Switzerland, we have come to understand the need for an SCF operating at a national level, integrating systemic investment efforts across economic sectors such as mobility, energy, food, and the built environment. Through our work on regenerative agriculture in the U.S., we are recognizing the opportunities for an SCF operating regionally and within particular food supply chains, such as dairy or soy. And in our research work, we have studied organizations playing an SCF-like role in “global systems”, as is the case with Builders Vision and their work on oceans.

A key point about SCFs is that they operate within one particular system or across multiple similar systems (e.g., mid-size cities in a particular geography). This allows them to sustain the interest as well as the analytical and relational foundations required to do deep systems work in the long run. It also enables them to engage systemic investors who want to diversify across multiple systems or act with system agnosticism.

By extension, a future in which SCF is a standard function in systems orchestration work is one in which there will be thousands of organizations playing that role; much like today, there are thousands of banks, asset managers, and investment advisors, each specialized in a particular niche. Those investors looking to deploy capital across multiple systems will thus interact with many SCFs, pointing to the need for operating protocols and digital tools that enable this new way of working at scale.

Organizational design principles

Insofar as SCF is a role, that role needs to be performed by someone. How, exactly, an organization performing this role would have to be designed and operated is an innovation question we’re going to explore in the coming months.

Based on our experience in systems orchestration and our learnings from the TCI’s initial experimental work, we believe the following design principles serve as a good starting point:

Design for mission loyalty

The ultimate client of any organization performing the role of SCF is a specific socio-technical system, and the SCF’s first loyalty must be to its systemic mission. In operating an SCF, it’s foreseeable that there will be a multitude of (sometimes competing) interests, creating the risk that the SCF is pulled in many directions at once. An SCF will thus need first principles to filter through different courses of action, guided by the question of what best serves the mission the SCF has been set up to accomplish, and it needs a governance structure designed to stave off mission drift.

Design for public benefit

Achieving mission loyalty will become easier if the SCF doesn’t operate with a commercial mindset. This doesn’t mean it needs to be strictly non-profit — an SCF could be a financially rewarding workplace. Nor does it need to be funded entirely by non-repayable grants — the activities it performs will be valuable, so the stakeholders who benefit from them should be asked to pay for the value they receive. But it’s hard to prioritize action according to what the system needs if there is strong tension with a profit motive.

Orchestration over duplication

In many systems that need to undergo transformation, a lot of financial infrastructure already exists, such as investment funds, local banks, and asset managers, as well as public funding sources. The SCF shouldn’t replicate what’s already working but instead enable and orchestrate actors present in the system.

Exploring the frontiers of SCF as an innovation community

This article serves as a departure blog for a collaborative process of design, experimentation, and discovery. As we embark on this journey, we recognize that there are others in our field who are arriving at similar conclusions about the need for a new kind of capital facilitation role. For instance, we see some of the ideas embedded in this article at play in Dark Matter’s “Bioregional Finance Facilities”, the European Union’s Climate City Capital Hub, and Metabolic’s “Place-Based Transition Funds”.

So our ambition is to create and test a blueprint for SCF along with others. To do so, we will…

• create an innovation and learning community of a select group of thinkers, designers, and practitioners that explores the frontiers of the SCF concept,
• test the emerging conceptual results in the specific context of our systemic investing prototype around regenerative agricultural transitions in the U.S., and
• coordinate with adjacent initiatives to cross-pollinate and learn from each other.

If you would like to ride with or alongside us on this journey, please reach out.