Systemic Funding Architecture: A Proposition to Catalyze Urban Climate Finance

This is the third article in a series that presents insights from an investigation into the challenges and opportunities of the urban climate finance movement. This investigation sits at the heart of a collaboration between the Centre for Public Impact (CPI), the TransCap Initiative (TCI), and EIT Climate-KIC, which have joined forces to bring systemic investing to cities in order to catalyze urban sustainability transitions.


By Dominic Hofstetter

Over the past 6 months, we have conducted a research and design inquiry to understand how to move the needle on urban climate finance. This inquiry encompassed a comprehensive literature review, interviews with more than 30 stakeholders, and several sensemaking and co-creation sessions with sector experts.

What has emerged from this process is a hypothesis of a value proposition that meets a salient need of cities while complementing existing support offerings: systemic funding architecture (SFA).

This article explains the rationale for SFA, details how it would create value, and makes a suggestion for the next steps. You can find a PDF version of this article here.

Need Space

Our research has surfaced that cities are looking for support on a great number of aspects related to climate finance. However, three need areas have emerged as most salient:

  1. Translating city-wide climate action plans into climate investment plans
  2. Building financeable portfolios of projects in a way that reduces complexity for cities
  3. Partnering with climate finance experts in ways that build city-internal capacity

Oftentimes, cities have a climate action plan but no strategy for getting it funded. This is not only an issue of technical expertise but also one of resourcing (not enough staff) and agency (no designated problem owner).

In addition, cities lack partners that engage with them in long-term, strategic ways; banks are often only interested in project-specific transactions, and consultancies are both expensive and disincentivized to help cities build internal capabilities.

Another critical element that is often lacking is the ability to bundle multiple climate projects into strategic portfolios and get these financed through a single financing and repayment mechanism. This would lead to more projects getting funded and reduce the complexity for city governments. It would also enable the orchestration of different forms of capital in a “funding architecture” logic and help mobilize capital from the private and philanthropic sectors.

Value Proposition

Systemic Funding Architecture (“SFA”) is about bringing a systems lens to the challenge of urban climate finance. We are proposing to establish a new non-profit organization or multi-stakeholder collaboration to help cities translate their climate action plans into long-term, multi-pronged climate investment strategies and get these designed, structured, and capitalized.

This can be seen as an enhanced, systemic form of technical assistance, one that is not based on single transactions but on whole portfolios of projects. It can include a capital matchmaking function and even evolve into a new kind of development bank.

What tangible value does SFA create for cities?

  • Enables the proper strategic deployment of capital with respect to a climate action strategy
  • Reduces the complexity of funding climate projects — a major issue for cities
  • Increases the number of fundable projects (through cross-subsidization effects and by eliminating the cherry-picking behavior of banks)
  • Amplifies the value / reduces the risk of the portfolio as a whole (via combinatorial effects)
  • Democratizes urban climate finance (through citizen engagement)
  • Enables long-term partnerships to build capacity and drive city-internal change in culture, structures, processes, and governance

What specific activities would the SFA perform?

  • Create climate investment plans steeped in a full-picture view of the overall economic context in which decarbonization and resilience investments take place and the strategic risks and opportunities of existing assets and proposed projects
  • Map the “system” of the city to identify key intervention points within a city’s strategic climate areas, such as building retrofits, transport decarbonization, green infrastructure, etc
  • Engage citizens and communities in co-designing and prioritizing investments
  • Design portfolios of projects/assets composed to generate combinatorial effects
  • Develop a funding architecture across multiple capital types (public finance, market-rate investment capital, concessionary capital, and philanthropic grants)
  • Design investment vehicles/programs capable of receiving and deploying multiple forms of capital in a long-term, strategically coordinated manner
  • Raise capital and structure individual, asset-level transactions
  • Nest investment vehicles/programs within broader systems change approach and ensure continued alignment with other societal stakeholders

What are the critical success factors for an SFA delivery organization/consortium?

  • Structured as a non-profit endeavor
  • Funded with grants to cover the cost of systemic technical assistance and capacity building (i.e., service delivery to cities at no cost to them)
  • Led by individuals who understand both public finance (and the political and institutional context in which cities operate) as well as finance/financing at the transactional level
  • Executed through secondments to cities so that SFAs can (i) perform their work based on a deep understanding of context and (ii) build capacity inside a city government
  • Governed jointly by finance professionals and civil servants
  • Enabled to work across multiple jurisdictions and regulatory regimes in order to unlock economies of scale
  • Embedded strategically into platforms and networks that offer scaling conduits (e.g., Net Zero Cities, ICLEI, C40)
  • Held accountable for enabling a broad range of impact goals, including those that are more elusive and harder to measure (e.g., resilience, equity, justice)

Capital Raising vs. Banking

One key design question that remains unresolved — and must be explored through experimentation in the next phase of this project — is whether an SFA mechanism must have agency over investment capital.

Some believe that as long as investment portfolios have the right risk/return characteristics, they will be able to obtain finance from banks and other investors. Others are of the view that the two functions of systemic technical assistance and systemic capital deployment must be housed in a single organization/collaboration in order for systemic investing to become possible.

Depending on the answer to this question, the SFA could either mobilize capital through matchmaking/placement or raise its own capital in the logic of a development bank.

Scaling Conduit

To minimize the risk that this innovation effort gets stuck at the end of the pilot stage, we propose to strategically align our work with an existing city network, such as the Net-Zero Cities (NZC) program orchestrated by Climate-KIC. NZC convenes 113 cities committed to reaching net-zero emissions by 2030 and collaborating under a common innovation logic. All of these cities face similar challenges related to urban climate finance. So if we succeed at bringing the SFA value proposition to market through an initial pilot, we will already have a platform for rapidly scaling our impact.

Next Steps

We propose to test the core assumptions at the heart of this value proposition as part of a yet-to-be-designed pilot involving the 1–2 pilot cities and running from April to June 2023.

Meanwhile, we appreciate any feedback about how to strengthen the above value proposition. Please leave comments in this document or send us an email.

Do you want to collaborate with us?

There is an urgent need to rethink the way we deploy financial capital for transformative impact in human and natural systems. The field of systemic investing has garnered significant momentum, and now is the time to scale deep and scale out. So we invite challenge owners, systems thinkers, innovation practitioners, investment professionals, ecosystem shapers, and creative voices to join us in figuring out how to redeploy financial capital in service of a prosperous and sustainable future for all.

How is systemic investing relevant to

Foundations

...because the pots of capital operating under a philanthropic logic are orders of magnitude smaller than those operating under an investment logic, so systemic investing is a way for foundations to leverage their capital in the systems they care about.

Corporations

...because their supply chains are becoming increasingly fragile and societal expectations of business are growing. This requires companies to deploy all the tools in their finance toolbox (incl. direct investments, advanced purchase agreements, and supply-chain financing) and partner more strategically with governments, foundations, and NGOs.

Impact Investors

...because single technologies, start-ups, or social enterprises—no matter how ingenious their solutions and how brilliant their teams—are unlikely to change systems by themselves. So what matters is that these single-point solutions are synergistically nested within a broader systems change effort.

Institutional Investors

...because mainstream ESG investing doesn’t benefit places and communities at the pace, scale, and quality required, so institutional investors must channel more capital into real-economy assets in a strategic and collaborative manner.

MDBs and DFIs

...because sustainable development in a VUCA world requires portfolio approaches to systems innovation, and those need to be funded with a different investment paradigm than those dominant in development finance institutions today. And because the public sector cannot finance sustainability transitions alone, so systemic investing is a way to crowd-in private-sector capital in a smart way.

Engage with us

Which option best describes your interest in systemic investing?

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About

Who We Are

The TransCap Initiative is a think-and-do-tank operating at the nexus of real-economy systems change, sustainability, and finance. We operate as a multi-stakeholder alliance coordinated by a backbone team and comprised of wealth owners, innovation leaders, system thinkers, research institutes, and financial intermediaries. Our community is open to anyone committed to our cause and values.

Why We Exist

We exist to improve the way sustainable finance is purposed, designed, and managed so that money can become a transformative force in building a low-carbon, climate-resilient, just, and inclusive society. We believe that the key to accomplishing this vision is to inspire and enable investors to leverage the insights and tools of systems thinking and complex systems science for addressing the most pressing societal challenges of the 21st century.

What We Do

Our mission is to build the field of systemic investing. This means developing, testing, and scaling an investment logic at the intersection of systems thinking and finance. We do that by convening a multi-stakeholder alliance to develop a knowledge and innovation base, test novel concepts and approaches, and build a community of practice.

Our core ideas borrow from the disciplines of systems thinking and complex systems science, challenge-led innovation, human-centred design, new economic frameworks, and financial innovation. Our experiments are contextualised in those place-based systems that matter most for human prosperity—such as cities, landscapes, and coastal zones—as well as in value chains and other real-economy systems. We hope that our work produces knowledge and insights, methods and tools, and a self-organising community of inspired and enabled change makers.

The places and value chains we intend to transform act as centres of gravity for our work. In each of these systems, we will work with challenge owners, communities, innovators, investors, and other stakeholders to design, structure, and finance strategic investment portfolios nested within a broader systems intervention approach.

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TransCap Core Team
community@transformation.capital