1 of 7: The Grand Challenge of Our Time: Transforming the Place-Based Systems Where We Live, Work, and Play

To safeguard human civilisation as we know it, we must fundamentally change the way our societies and economies operate. Yet what remains largely unclear is how, exactly, financial capital needs to be deployed to build a low-carbon, climate-resilient, just, and inclusive future.

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.

Wind Turbine
The sustainable finance challenge is much broader and more complex than investing in low-carbon assets such as wind turbines. The challenge is of a systemic nature, and it touches upon a slew of social issues in real-world places and value chains that many sustainable finance initiatives do not address sufficiently.

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.

What’s Next?

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.

Keep on Reading

  • The Limitations of Traditional Finance in Catalysing Systemic Change

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    The paradigms, structures, and practices of today’s financial sector prevent it from unleashing deep, structural change in the real economy. Narrow notions of value, outdated world-views, constraining financial mathematics, and a low sense of responsibility for social outcomes drive a wedge between market values and human values.
  • The Need to Lift Sustainable Finance onto the Next Level

    3
    Dozens of sustainable finance initiatives (SFIs) have set out to mobilise climate finance at the trillion-euro scale—a welcome and important effort. Yet most are still bound to produce incremental outcomes at best in the place-based systems that matter most for human prosperity. This is because most SFIs remain steeped in traditional finance orthodoxy, focus on secondary markets such as stock exchanges, follow a single-asset mentality, and are primarily concerned with reducing risk rather than creating value.

Download the White Paper

The TransCap Initiative is a collective effort. Its contours have been drawn by a community of visionary innovators, finance professionals, scientists, entrepreneurs, systems thinkers, and creative minds who represent some of the most audacious and progressive organisations dedicated to tackling the climate crisis. By participating in co-design sessions and interviews, or by writing about their work and experience, they have contributed invaluable insights to the quest of a new investment logic fit for catalysing the transformation of those systems that matter most for human prosperity. The TransCap white paper synthesises their ideas into a starting point for the journey of exploration and discovery that lies ahead.

Engage

Challenge Owners

Do you represent an ambitious city council, regional or national government, multilateral institution, foundation, or another organization with a mandate to transform a human or natural system?

Contact us to learn more about systemic investing and funding architecture in service of your climate action plan.

Investors

Are you an asset owner, an investment advisor, an asset manager, or a financial intermediary looking to explore the next frontier of sustainable finance?

Reach out to learn more about systemic investing and to discover investment opportunities.

Innovators

Are you working on a novel idea, concept, space, method, strategy, tool, structure, philosophy, or metric relevant for building the field of systemic investing?

Get in touch to find out how to engage in our prototyping work and how to contribute to our community of practice.

Funders

Are you interested in supporting the design and mainstreaming of a new investment logic that challenges existing financial paradigms, structures, and practices?

We’d love to hear from you.

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Contact Us

Dominic Hofstetter, Space Building Lead
dh@transformation.capital

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About

What We Do

The TransCap Initiative is a collaborative space for developing, demonstrating, and scaling systemic investing in the places 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 apply systems thinking, human-centred design, and the principles of mission-driven innovation to explore how financial capital can catalyse the transformation of systems in service of a low-carbon, climate-resilient, just, and inclusive future.

Our mission involves developing a knowledge and innovation base, testing novel concepts and approaches, and building a community of practice. In doing so, we recognise the complex adaptive nature of human and natural systems and the fundamental uncertainty that governs their evolution, and we thus emphasise the need for collaboration, experimentation, and learning.

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.

Who We Are

The TransCap Initiative convenes a diverse community of partners from the private, public, civic, academic, and philanthropic spheres. Many of our community members are world-leading thinkers and doers in the fields of systems innovation, sustainable finance, public policy, social innovation, and sustainability research. It is a dynamic community, open to anyone committed to our cause and values.

The TransCap Initiative was initiated in 2019 by EIT Climate-KIC with support from the European Institute of Innovation and Technology (EIT).

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Contact Us

Dominic Hofstetter, Space Building Lead
dh@transformation.capital