In the US hospital drama ‘House,’ Dr Gregory House, played by Hugh Laurie, led a team of specialist diagnosticians. Their ability to connect widely varying symptoms led them to diagnoses traditional approaches failed to identify.
This fictional series provides the best analogy of a new approach to impact investing that is rapidly gaining momentum: systemic change.
Tackle the root of the problem
At the heart of the idea is that impact investing should tackle the root cause of a problem, rather than solving the symptom. Emissions from fossil-fuel guzzling cars and vans account for around 10% of total global CO₂ making it a logical area to tackle to reduce GHGs. The electric vehicle (EV) industry has grown rapidly in response and in just a few short years, accounts for 14% of all new car sales worldwide.
The logic that lies behind the growth of EVs is clear but derives from decades-old thinking that we learn in our childhoods. Breaking down complex matters into bite-sized pieces allows us to more easily analyse and understand the issues at hand. But this reductionist approach tends to ignore the simple fact that very few things exist in isolation.
So it is with EVs, and there are significant unintended consequences to taking a one-dimensional approach. First is the production and disposal of the lithium-ion batteries with their potentially harmful heavy metals. The second is that for cities such as Hong Kong and Singapore, EVs are charged via electricity grids still powered by fossil fuels driving up the use of coal, oil and natural gas.
By contrast, systemic investing - as Dominic Hoffstetter describes it - assumes that systems change is the result of multiple shifts happening within a system at the same time and with a degree of strategic coherence.
Put the problem at the centre
Systemic investing recognises the complexity of societal and environmental challenges in front of us and asks what changes do we really want, or need to see. As Michaela Edwards, Partner at Capricorn Investment Management, commented recently: “you have to put the problem at the centre, rather than focus solely on asset classes.”
In short, it turns impact investing on its head by identifying the real problem before determining how to apply capital to solve it. It requires a deep understanding of all the stakeholders involved and how they interact together.
S2G Ventures is a great example, showing the impact of systemic investment. Warming waters in US coastal waters have led to a decline in starfish, a natural predator for sea urchins which have begun decimating kelp forests. An investment in a company to harvest sea urchins while also funding research in kelp and a starfish breeding programme is having a rapid and profound impact in the waters off the Northern California coast.
Systemic investing also requires a rethink of how capital is applied to the problem. Some situations may call for research grants to better understand the real challenge; others might need seed capital, or alternatively local or central government support through subsidies or tax incentives.
Systemic change needs greater collaboration
This poly-capital approach also requires far great collaboration, which has not always been a hallmark of investment communities but is a core characteristic of successful impact investors or FLIs. Sharing ideas and data opens up opportunities to solve systemic issues in ways that individuals cannot achieve by themselves. It also catalyses other investors creating, as Edwards calls it, a “crowd-sourced fly wheel effect” that has the potential to deliver outsized impact.
Regen Melbourne is an example of a city-wide approach to systemic investing. Born out of the devastating fires that covered the city in thick, black smoke during the summer of 2020, as well as the effects of Covid, it aims to reimagine and remake Melbourne by taking a systems-level approach. One of its key projects is to make the Birrarung – ‘river of mists' in the language of the Wurundjeri people – swimmable again, using that word as a proxy for the wider goals of reconnecting the city with the waterway that is ‘inextricably linked to its health and biodiversity.’
The project requires multiple city, state and federal departments to work together to create policy and regulations that can provide the framework for the project to succeed. It needs enterprises to play their part and for the citizens of Melbourne not only to support the project, but play an active role in its delivery. It also needs millions of dollars in finance to turn the project from a good idea into reality.
Closer to home, Circular City is an example of a homegrown Hong Kong project that aims to solve the endemic problem of waste-tarnished beaches through a holistic approach to plastic pollution. Working with government, developers, building operators and F&B outlets, Circular City has created a reusable tableware solution that can virtually eliminate plastic in the F&B sector. It tackles the problem at the root, rather than simply mobilising people to clean up the beaches.
Investors must help catalyse capital
Systemic investment is not for the faint hearted: it requires extensive research and a deeper dive into the causes of the environmental and societal challenges that need to be tackled. It needs investors to become convenors of stakeholders, and catalysers of capital. This is a very different approach and will not suit all impact investors.
However, if we are to truly change our world, the status quo cannot continue. As Hanson Gong of Oogway Capital phrased it, our views are like the inner tube of a bicycle tyre: the more you hold on to what you have, the harder it is to change.
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Photo by Jeremy Bishop on Unsplash
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