To avoid catastrophic global warming and preserve the social, natural, and financial wealth our societies have built, the Intergovernmental Panel on Climate Change (IPCC) is calling for the rapid, far-reaching, and unprecedented transformation of the socio-technical systems that constitute the bedrock of our modern way of life: energy, land use, infrastructure, industry, maritime systems, and cities.
This suggests that we must change not only the methods and technologies used to extract, convert, and allocate resources within our economy. We also need to shift values and norms on both the individual and collective level to create a more equitable balance of political, cultural, and institutional power in society.
Implied in the IPCC’s call to action is the notion that the most pressing and tangible problems of our time are not technical in nature—they are systemic.
In addition, climate change is no longer primarily a problem of technology development but of technology diffusion, and incremental improvements in single-point technical solutions are not going to unlock change at the necessary pace and scale. The challenge ahead is to weave a new fabric of society with a yarn spun not only from technological advances but also from cultural, political, social, and economic innovation.
The Role of Financial Capital
Financial capital is an important lever of change in socio-technical systems. The way in which money accumulates and flows within them determines our ability to build a low-carbon, climate-resilient, just, and inclusive society.
Under the label “sustainable finance,” dozens of initiatives have set out to tackle what the Paris Agreement frames as a realignment challenge. Most have chosen to focus on the quantitative aspect of the problem, aiming to increase the volumes of money invested in “Paris-aligned” or “SDG-aligned” assets.
While increasing the quantity of sustainable finance is important—the world still faces a multi-trillion investment gap to meet the ambitions of the SDGs—many qualitative questions remain unaddressed. What exactly does it mean to deploy capital in service of reduced emissions and increased equity, and in the context of sustainable development and efforts to eradicate poverty, as the Paris Agreement demands?
Mobilising greater quantities of climate finance is only one aspect of the challenge. We also need to figure out how, exactly, to deploy climate finance if the purpose is to transform place-based systems.
More specifically, there remains a long list of questions about how to invest climate finance in service of the type of real-world, place-based systems transformation that the IPCC is calling for:
- How do we make sense of a system—where it is today, where it needs to go, and how it can get there—in a way that informs investment decisions?
- What assets do we need to finance if the goal is not just to generate a financial return and reduce emissions but also to strengthen resilience, social justice, and inclusiveness?
- How can we identify sensitive intervention points where small changes have big effects?
- Given that single projects do not have the power to change systems, how can we design and manage portfolios that do?
- How can we make investing in sustainability transitions more participatory and democratic?
- How can we cultivate a community of investors who self-identify as proactive change agents and take responsibility for the future trajectory of society at large?
While sustainability-related investments have been rising in recent years, few sustainable finance initiatives offer compelling answers to these questions. Most are bound to generate incremental change at best, making small improvements on a status quo that is structurally incompatible not only with the notion of environmental and social sustainability but also with the idea of long-term wealth preservation.
The main reason why most sustainable finance initiatives fail to address these questions and are thus geared for incrementalism is that they remain steeped in traditional finance orthodoxy—in the paradigms, structures, and practices that guide decision-making in today’s capital markets.
Yet going forward, any investor with the intent and mandate to finance sustainability transitions, and therefore contribute to long-term wealth-preservation, must engage with these questions. It will no longer be enough to minimise risks and maximise financial returns—the objective function has changed.
The Need for a New Investment Logic
As we push ahead in the third decade of the 21st century, there is little time left to reverse our emissions trajectory and protect our communities from the consequences of a warming planet. The time for incrementalism is over.
What we need now is a new approach to investing for systems transformation in the places that matter for human prosperity—one that deploys capital with a broader intent and mindset; that is anchored in different methodologies, structures, capabilities, and decision-making frameworks; and that moves away from a project-by-project mentality to a strategic portfolio paradigm.
Before Delving in, a Reality Check
We recognise that the opinions we offer here are critical of how society relates to wealth and of how many finance professionals go about managing that wealth. Yet what we advocate for is not to overthrow capitalism, revolutionise the monetary system, or disregard the financial interests of asset owners. Nor do we suggest that everybody needs to agree with our norms and values.
We do believe, however, that it is evident that much of capitalism as practised today is destructive for the planet and unjust to many and therefore not only unsustainable for society but also perilous for investors in the long run. At the same time, we know that capital can be part of the solution if we find ways of deploying it more intelligently and without sacrificing its current needs and preferences.
There is nothing in the theory of systemic investing that suggests that financial return and positive transformative change are mutually exclusive. In fact, we believe that systemic investing holds the promise of attractive returns and long-term wealth preservation while catalysing the type of change the world needs to ensure prosperity for all—a process the finance industry must facilitate in order to retain its social licence to operate.
Developing, demonstrating, and scaling a new investment logic is a complex challenge. It is in the nature of complex challenges that they cannot be solved by following a script. So what lies ahead is a journey of exploration and discovery, a systematic inquiry of what is possible, probable, and preferable.
The ideas set out herein serve as the starting point. We invite challenge owners, systems thinkers, innovation practitioners, investment professionals, ecosystem shapers, and creative voices to join us in figuring out how to deploy financial capital in pursuit of the greatest ambitions we hold for our future.