4 of 7: TransCap: Towards a Systemic Investment Logic

The transformation capital approach is a new systemic investment logic aiming to transform real economy systems by deploying capital with a broader intent, using systemic methodologies, structures, and decision-making frameworks, and moving from a project-by-project mentality to a strategic blending paradigm.

To safeguard both our society and economy, we must fundamentally change the way we interact with the physical environment of the Earth. The interactions that matter most are those that happen in the place-based socio-technical systems that provide us with energy, mobility, food, housing, water, and other goods and services characteristic of modern human civilisation.

The change we need is not incremental. We must rewire almost all aspects of how societies operate: technologies, values and social norms, materials extraction and use, institutions, education and skills, economic paradigms, policy and regulation, and financial flows. The sustainability movement uses a technical term for such deep and irreversible change in economic, technological, societal, and behavioural domains: transformation.

In the context of climate change, transformative change is not just about depth and irreversibility but also about directionality. Human economic activity must transition from its extractive, exclusive, and unsustainable status quo to a regenerative, inclusive, and sustainable model that respects the natural boundaries of our planet and the social needs of our communities.

The logic—the collection of paradigms, structures, and practices—under which money is invested is a powerful driver of a system’s behaviour. What determines such a logic is the purpose for which money is deployed. If invested effectively, money can cause or accelerate the accomplishment of that purpose.

We thus define transformation capital as …

an investment logic intending to deploy capital to catalyse directional transformative change of socio-technical systems to build low-carbon, climate-resilient, just, and inclusive societies.

Put simply, transformation capital is a systemic investment approach for catalysing sustainability transitions in the real economy.

The Nature of the TransCap Approach

As a capital deployment logic, transformation capital inhabits the nexus of systems thinking and investment practice. It recognises that financial flows occur in networks of actors and relationships, which are bounded by institutions and social norms and constituted by people. It aims to build a bridge between the Paris Agreement’s goal of realigning financial flows and the IPCC’s call for transforming socio-technical systems.

The TransCap approach recognises that today’s conception of wealth is no longer an appropriate proxy for human prosperity. Nor is the current version of capitalism future-proof. This creates the need for investors to expand their notion of value to include non-financial goods such as social equality, political stability, intergenerational equity, and ecological sustainability, without which the traditional concept of wealth is threatened.

The Context of the TransCap Approach
The transformation capital approach is an investment logic at the intersection of systems thinking and finance practice. It aims to build a bridge between the Paris Agreement’s goal of realigning financial flows (Article 2.1c) and the IPCC’s call for transforming socio-technical systems. It guides challenge owners and investors in the real economy in deploying capital for transforming real economy systems, thereby contributing to the global effort of building a future-proof version of capitalism.

The World as a Complex Adaptive System

A hallmark of the axioms underpinning transformation capital is that the world operates as a complex adaptive system. Such systems consist of many parts that interact dynamically, process information, and adapt their behaviour.

Complex adaptive systems share three defining characteristics: they constantly evolve, they exhibit aggregate behaviour (emergence), and they anticipate. These characteristics endow complex adaptive systems with a set of peculiar features, such as self-organisation, feedback loops, tipping points, and non-linear growth. Importantly, these systems behave in non-deterministic ways, making it difficult to predict cause-and-effect relationships in advance.

The nature of complex adaptive systems has profound implications for designing intervention strategies, not least for how to deploy capital in service of system transformation. In complex adaptive systems, deterministic action plans are bound to fail, predictive tools are unhelpful, and excessive categorisation is constraining. More promising approaches emphasise exploration, experimentation, and rapid learning, and they try to harness the defining characteristics of complexity.

The Importance of Intent

At the heart of transformation capital sits intent. While the concept of intent is related to that of objectives, it lives on a higher level of abstraction and is more closely related to the idea of purpose. This distinction matters because many sustainable finance initiatives (SFIs) are explicit about their objectives but not about their intent.

In fact, many SFIs pursue laudable environmental and social objectives but operate with the intent of retaining a version of capitalism that ascribes a singular purpose to investment capital: to multiply itself. In contrast, transformation capital intends for investors to deploy capital primarily to create change dynamics that propel a system in a specific direction, both in order to set the system on an environmentally and socially sustainable footing as well as to enable the continued multiplication of capital in the long run.

Being clear about intent also matters because what investors set as their priorities determines what they care about. Investors pursuing systemic change will interrogate the universe of investable assets with different frameworks and metrics for evaluating potential, success, and failure. They will also bring a different spirit and mindset to their investment practice.

Setting Directionality through Missions

The directionality so characteristic of systemic investing is set by the challenge owner: a government, multilateral organisation, foundation, corporation, or individual with the resources, influence, sense of agency, and mandate to address climate change on behalf of others. It must be articulated in a transformation agenda—or “mission”—as a statement of intent.

When imagining the future, it is useful to keep in mind that systems move from one state to another through an evolutionary process. One of the marvels of evolution is that it produces a great variety of designs that are fit for a specific purpose. This means that there is a multitude of different system designs that meet a specific intent. So what counts for sustainability transformations is not to perform a precision landing on an individual design (i.e., to meet clearly defined objectives) but instead to arrive somewhere within a general landing zone, such as the “safe and just space for humanity” suggested by Kate Raworth’s Doughnut Economics.

However the landing zone is defined, it is useful to recognise that systems are path-dependent—where they come from determines where they can go next. Further, transformations do not occur as discrete phenomena but progress along a gradient, evolving forward along a series of "adjacent possibles". This means that systemic investors must develop a sense of the transition pathways that a socio-technical system could reasonably take given its current resource base and configuration.

Complex adaptive systems have self-organising properties. Investors can harness these by deploying capital in a way that changes a system’s dynamics. This requires that their impact assessments focus on indicators of transition dynamics rather than on static outputs such as project-level emissions savings.

The Role of Capital and Investors in Driving Systemic Change

How, exactly, capital drives a system’s behaviour is not well understood, particularly in the context of sustainability transitions. The TransCap Initiative will operate with two bold assumptions: that monetary flows can trigger systems-transformative dynamics, and that investors can be active agents of change and determine the shape and direction of these dynamics.

Irrespective of the agency of money and that of the people deploying it, it is clear that the causal chain between interventions in secondary markets (such as stock exchanges) and effects on emissions and resilience in place-based systems is long. This is why the transformation capital approach focuses on the real economy, working as close to the sources of emissions, resilience, justice, and inclusiveness as possible.

The Humanscape

Systems thinking is an abstract discipline, and so is finance. But even in the institutionalised world of finance, the system’s behaviour ultimately emerges from the actions of people. This is why transformation capital emphasises the agency of the individual, calling upon decision-makers to critically reflect upon the role they play in shaping the future, and to choose action over complacency and responsibility over deference.

Yet a strong sense of individual agency is not the only people-related success factor. Systemic investing is inherently collaborative. So actors from all parts of society—civil servants, sustainable development specialists, asset owners, finance professionals, regulators, trustees, auditors, and corporate executives—must work together in a trustful, respectful, and mission-oriented manner.

Impact Promise

Article 2.1c of the Paris Agreement calls upon the world to “make financial flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.” What that means from a practical perspective remains largely unclear, and work focused on operationalising this article has only just begun. Nor is it obvious how today’s most prominent sustainable finance initiatives can build a bridge to the IPCC’s call for real-economy transformations at the scale and pace we need.

The TransCap approach is not a sure-fire recipe for driving the kind of deep, structural change the world now needs. But the intent, mindset, sense of agency, and method with which it goes about the challenge are reasons to believe that it holds the promise of increasing the effectiveness with which we deploy capital for transformative effects.

Keep on Reading

  • Getting Practical: TransCap's Design Space

    5
    At the core of transformation capital sit strategic portfolios—multi-asset-class investments selected and governed to unlock combinatorial effects and nested within a broader system intervention approach. TransCap reimagines notions of value and how value is generated, captured, and shared. It enables investors to make sense of a system and identify sensitive intervention points. It redefines who participates in the investment process. And it reconceptualises the meaning and measurement of impact.
  • The TransCap Initiative: A Do-Tank for the Sustainable Finance Movement

    6
    The TransCap Initiative is developing, testing, and scaling a mission-oriented systemic investing approach while building a pipeline of strategic investment portfolios at the multi-billion-euro scale. It has an open-ended, multi-stakeholder, and action-oriented structure and borrows methods from human-centred design and systems thinking to build a space for collaborative research, prototyping, and field building.

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.

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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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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