A (system) change is coming (part 2): the eight emerging trade-offs for financing for sustainability

Note: This is the second part of my re-examination of the trade-offs that are emerging when it comes to financing for sustainability and how the ‘systems change’ perspective has altered my view of these trade-offs. The first part can be found here.

Our understanding of today’s most entrenched social and sustainability issues – from intergenerational poverty, plastic pollution to climate change – as the side effects of what are complex adaptive systems is coming of age and with it, a whole new way of pulling together large-scale human activity with due concern for sustainability and social equity.

While people have long been calling for the need to work across professional, sector and social siloes to address today’s increasingly multidimensional problems, what has been missing were scalable frameworks for such partnerships to be designed around.

‘Systems change’ is showing great promise for inspiring such frameworks, and the profound implications on how we imagine and design the funding of human activity are being noticed across many professional fields — including in matters of sustainable finance and philanthropy.

Building on the intuitions that I highlighted in the first of two blog posts, I want to frame how the systems change lens has changed my views on the emerging trade-offs that the funding of large-scale human activity must compose with.

From five to eight: balancing the eight-way equation

In late August 2020, EIT Climate-KIC published a trailblazing white paper which outlines the most advanced framework to date for testing and developing an investment approach for catalysing sustainability within complex adaptive systems — an investment approach it has called Transformation Capital. This initiative offers a pioneering and hugely inspiring “North Star” for the (hopefully near) future of finance for sustainability.

However, in the meantime, in order to finance today’s increasingly urgent sustainability goals, the need to compose with today’s imperfect investment approaches (biased towards short term, siloed and “systems-blind”), serviced by a fragmented universe of investors, financiers, philanthropists and communities, is bound to require making trade-offs.

In practical terms, designing a financing arrangement for sustainability of a given level of ambition requires making trade-offs until a workable (and not merely “bankable”) equilibrium can be reached.

I have found it helpful to rationalise these trade-offs across eight broad interdependent spectrums — dynamically attempting to balance an eight-way equation:

  1. Scale of Intention: from single purpose endeavours to mission-led finance to transformative systems change
  2. Scope of Activities: activities considered for funding, from single projects (commercial or non-commercial) to integrated multi-sector programmes and portfolios of activities for ‘systems change’-led transformation strategies
  3. Profitability: financial return expectations and time horizon
  4. Availability and Conditionality (of finance)
  5. Brokering: the number and variety of funding parties together (from matchmaking to multipartite consortium-building)
  6. Value for Money
  7. (Leveraging the) Agency of Finance (more on this later)
  8. Governance & Coordination

Trade-offs for the highest scale of intention

[Transformation Capital] intends to catalyse deep, structural, and irreversible change at the level of whole socio-technical systems. The scope and ambition of this intent surpass those of most traditional impact investors, who tend to focus on specific, and often localised, outcomes.

Excerpt from “Transformation Capital: Systemic Investment for Sustainability” (EIT Climate-KIC, August 2020)

When it comes to designing a funding strategy with intentional sustainability goals, the greater the Scope of Intention, the greater value there is to having wide trade-off flexibility across the other spectrums.

The intention to facilitate systems change is the highest level of ambition for a sustainability-driven funding strategy.

This often means that it will have the widest Scope of Activities. Indeed, systems change can rarely be designed around a single “silver bullet” intervention and is more likely to be facilitated through a coordinated portfolio of interventions on the targeted system’s “leverage points” – some of these interventions can be of a commercial nature (a social business), but others not (policy reforms, awareness campaigns, etc.).

EIT Climate-KIC’s Transformation Capital refers to such combinations as “nesting”, and this variety in turn introduces the need to consider trade-offs across all areas for a workable funding strategy.

  • Profitability: Who can fund the non-commercial activities? Do they have the flexibility to fund interventions that don’t directly contribute to enhancing the profitability of the commercial piece of funding? Is profitability measured at the aggregate level across all funding instruments or separately per funding instrument or per intervention? over what time horizon?
  • Brokering: there will probably need to be a diverse group of funders across philanthropic, concessional and commercial funders to support the full Scope of Activities (for instance, a recently-formed financing taskforce for Indonesia’s systems change-inspired National Plastic Action Partnership has no less than sixteen funding partners of different kinds).
  • Availability & Conditionality: a newly-formulated trade-off area for me, this replaces the rapidly ageing idea of ‘Bankability’, as there are now a number of funders willing to add more shades and combinations to the spectrum of concessional and non-concessional capital (grants, repayable grants, ‘patient’ capital, catalytic capital, results-based finance, blended finance, etc.), which also introduces various availability conditions. I align this trade-off area with what EIT Climate-KIC’s Transformation Capital refers to as “blending” of financial instruments.
  • Value for money, which comprises (i) financial Value for Money for the public sector (one of the reasons Public-Private Partnerships (PPPs) typically require a dedicated PPP office and sophisticated contractual, regulatory and legal arrangements); and (ii) overall effectiveness and efficiency towards achieving the intended sustainability goals as assessed through Effectiveness & Evaluation (commonly described as Monitoring & Evaluation (M&E) and Impact Measurement and Monitoring). In essence, the more a Scope of Intention is ambitious and the associated funding approach complicated, the more it requires producing, interpreting, and managing varied sets of quantitative and qualitative information. From a practical standpoint, there must be point at which either the trouble or the degree of confidence in the Effectiveness & Evaluation approaches force making trade-offs across the other areas.

As an aside, the disciplines involved in Effectiveness & Evaluation are undergoing very rapid change owing to the embrace of the UN SDGs across the international development and financial communities, exploding demand for more non-financial disclosure (ESG metrics, climate risks, the value of natural capital, value chain resilience, social goals like racial inequality, etc.) and the growing body of work for evaluating the effectiveness of systems change financing interventions (the ‘Performance Domain’ as described by EIT Climate-KIC’s Transformation Capital).

The two remaining trade-off areas – the Agency of Finance and Governance & Coordination – are newer considerations, arguably borne from the swelling interest in systems change and how to fund it.

Not just a funnel: the agency of finance

Recognizing that funders become a part of the systems in which they intervene means that both their entrance into, and departure from, these systems have consequences, intended and unintended. Funders should be sensitive to this influence, incorporate it into funding considerations, and manage it to the extent possible.

Scaling Solutions Toward Shifting Systems: Seeing, Facilitating and Assessing Systems Change report (Rockefeller Philanthropy Advisors, July 2020)

Many investors see money as a passive entity that flows through a “landscape of opportunity” to the most attractive assets (…). An alternative view posits that money is an active entity in determining what happens in a system and that the real landscapers are, in fact, investors themselves.

Transformation Capital – Systemic Investing for Sustainability (EIT Climate-KIC, August 2020)

In a recent report on the role of innovation prizes and challenges funds, international development monitoring and evaluation specialists working on UK DFID’s Ideas to Innovation programme highlighted how these funding approaches can catalyse innovation, but also contribute to increasing awareness, energise local communities and businesses around an issue and evidence new knowledge.

More broadly, there is an emergent appreciation of the fact that the choice of funding approach – the financing instruments, financial incentives and fundraising methods – is not merely a neutral tool for funnelling financial resources in the most effective and cost-efficient manner to the targeted system; it has agency.

Leveraging the agency of a given funding approach in order to intentionally contribute to development goals and systems change remains an underreported field and introduces a further range of trade-offs for designing a funding strategy: how could the funding approach influence the actors and dynamics within the targeted system? Should the funders actively leverage such influence to affect change or should they go for “easy money” and try to stimulate the system otherwise (Scope of Activities)?

Governance & Coordination for funding systems change

Evidence is growing that when the Scale of Intention rises, so does the need to accommodate a broad range of actors and indeed of funders – and there is a cost to that. The case of traditional Public-Private Partnerships (PPPs), with the need for dedicated PPP offices, is but one example of this.

Designing and “rightsizing” a workable Governance & Coordination model is about managing this cost. This is likely to be a major feature (trade-off) for the most ambitious sustainability-led funding strategies, especially when it comes to systems change for several reasons.

Firstly, a highly diverse group of funders and partners will often mean collaborating and coordinating across different funding cultures (philanthropy, development finance, impact investing etc.) with their respective development, implementation and evaluation challenges as broadly described in the previous trade-offs, not to mention legal, regulatory, tax , power, capacity and cultural differences.

Moreover, mission-driven finance people are still working out the financing partnership and value capture models that will hold together diverse participants within a funding strategy for ambitious sustainable development. There is an urgent need to develop new lenses to see the value of sustainability (externalities, co-benefits, co-impacts, spillover effects, combinatory effects, etc.) and, crucially, develop mechanisms of various degrees of complicatedness to capture that value. Whether such mechanisms involve monetisation (e.g. land value capture; investment “spillover” effects) or not (e.g. results-based payment arrangements), this almost inevitably introduces a degree of complicatedness to the overall Governance & Coordination of funding arrangement.

Finally, at the more ambitious end of the Scale of Intention, facilitating systems change is an inherently more difficult endeavour than impact investing and other mission-driven finance approaches. Not only does it typically include the greatest potential Scope of Activities, but given the nature of complex adaptive systems, these activities must be designed with agility in mind (experimentation, learning and course-correction) in order to adjust in response to (our understanding of) changes in the targeted system – and how to fund these responses where required.

Taken together, failing to design a workable Governance & Coordination model can eventually render the implementation and management of a funding strategy unwieldly and ultimately counterproductive.

Keeping things simple: the emergence of “systems change donors”

The flexibility of our [funding] approach is meant to help organisations keep their eye on outcomes rather than sticking to a funder-endorsed logframe written in stone.

Co-Impact Fund handbook (June 2019)

For systems change experiments to work, we have to lighten up on the metrics piece for a significant chunk of time at the front end of a project. Ultimately, it comes down to trusting the grantees.

Darcy Riddell – Director of Strategic Learning, J.W. McConnell Family Foundation

The biggest challenges to funding systems change are linked to the emerging, radically different way of working required to facilitate such change in systems that have been recognised as complex and adaptive in nature. Today’s financing schemes are generally based on single projects with time-bound performance metrics and various degrees of conditionality, whereas systems change work requires agility across portfolios of projects programmed for experimentation, learning and course-correction. It’s an approach that is difficult to match with the existing way of funding things.

In response to this, an emerging class of donors and funders is identifying as “system change donors”. These are often philanthropic donors, who accept the complex and adaptive nature of certain systems and therefore are willing to fund programmes and organisations with significant flexibility. This fragmented universe of funders is beginning to coalesce and develop shared views on funding across of number of initiatives and forums, including the Collective Impact Forum, Catalyst 2030, the Co-Impact Fund, the Social Innovation Exchange (SIX)’s funders node or Rockefeller Philanthropy Advisor’s ‘Scaling Solutions Toward Shifting Systems’.

One of the great contributions of this class of donors and funders is its ability and indeed mandate to simplify the funding of systems change thanks to their in-principle willingness to fund a variety of different activities (thereby reducing the need for larger groups of specialised funders) and to simplify the Governance & Coordination of an overall systems change funding programme, allowing for wider flexibility across all trade-off areas, including in the Scope of Activities.

The emergence of such donors is another way of highlighting the need to break up today’s fundraising silos (philanthropists speak to charities, start-ups speak to venture capitalists, investment banks speak to institutional investors, etc.) and capital providers (now impact investors are also providing so-called “patient capital” and other forms of concessional finance).

Financing tomorrow in today’s world

These are grave, exciting, changing, unchartered times and both our responses and our ways of arranging finance for them are not yet fit for purpose. There is no time to waste in finding ways to finance the transformation towards a more sustainable way of life. While work such as EIT Climate-KIC’s Transformation Capital is on the horizon and the class of self-identified “systems change donors” continues to grow, inspiring multipartite financing partnerships are beginning to be formed and experimented with to address sustainability through the lens of systems change.

There will no doubt be interesting lessons to be learned from the governance models and funding strategies adopted by these pioneering initiatives about the trade-offs (either identified or ignored), especially with respect to how they manage the funding arrangement for Governance & Coordination.

Keeping up with vast array of changes and experiments that are concurrently happening in public policy, sustainable finance and the applications of the systems change perspective across these fields is daunting. But in order to finance tomorrow in today’s world, navigating the trade-offs can provide a yardstick to help make sense of these changes as we messily design our way towards funding this journey of transformation.


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