If you’re keeping up with the latest impact investing news, you’ve likely come across discussions linking impact investing with systems change. Despite frequent mentions, it can still be unclear why systems change is at the heart of impact investing.
Systems, Systems Everywhere
Everything in the world operates within a system. From the environmental impact of our homes to the wait times in healthcare systems, from a university student searching for affordable housing to a refinery aiming to decarbonize its operations, these are all interconnected parts of larger systems. Each local or global activity ties into broader networks, presenting both challenges and opportunities.
Given that systems are interconnected and exert significant influence over various components, it’s unrealistic to expect positive change to occur in isolation. The complexity of systems can seem daunting: solving one problem often reveals numerous underlying issues that must be addressed. On one hand, this provides a reality check regarding the scale of our challenges. At the same time, the links within and between systems can also be our greatest ally in driving positive change.
Role Of Impact Investing
Imagine sitting in front of a crystal ball, peering into countless potential futures. Each trajectory represents a different system design that shapes what lies ahead. Many factors influence which scenarios become reality, with capital markets being among the most impactful drivers of our future in today’s economic landscape.
Investment decisions have the power to determine which future pathways become more likely. By shaping capital markets, we can effectively shape the future itself, this is where impact investing and systems change intersect.
Impact investing aims to generate positive, measurable outcomes with intentionality. It channels capital into projects, companies, and sectors, ultimately influencing entire systems. The core objective of impact investing is to transform systems for the better, achieving multiple outcomes simultaneously. Thus, impact investing and systems change are intrinsically linked.
Combinatorial Effects
A key concept in systems change is combinatorial effects. Rather than looking into effects in isolation, a bundle of activities creates a combination of positive and negative outcomes. This idea brings a portfolio-level mindset to impact. A collection of investments, across geographies and asset classes can create a multiplication effect and trigger system change from different points.
However, achieving this is easier said than done.
Systems are dynamic, and as we delve deeper, we’ll uncover new connections that can be transformed. If everything is interconnected within a larger system, how can we effectively measure system-level impact? Is it truly possible to ascertain whether systems change is occurring?
The scope of the work may sound scary considering the scale of systems. Good news is, as we better understand and map the systems, we can identify, measure and monitor positive outcomes in relation to systems they live in.
Layers Of Impact
In addition to the systems change we can create with direct positive outcomes of our investments in specific impact areas such as clean energy, affordable housing, quality healthcare and education, each investment decision is also part of the capital system, which has its own deep systemic problems.
This gives impact investors another opportunity to be influential by transforming the investment decision-making processes. It brings the topic of investor contribution to the place. Investor contribution in its most simplistic form aims to identify ‘what would have happened in the absence of the investor’.
For instance, the race and gender of a person are still significant determinants of how easily a person can access financing. Impact investors deliberately financing groups with limited access to capital, such as women founders, can trigger system change in the capital system in addition to the positive impact the companies led by women will achieve.
The systems are complex and require a careful understanding of many different strings that bring them together. Systems are also connected, and influenced by each other. Impact investing creates portfolios of investments that touch different parts of the systems, and can achieve a synergy where the whole exceeds the sum of its parts.
