Big problems require big changes
We live at a transitional moment in history. We are aware of the environmental limits of our global eco-system and the risks of continuing to pursue financial growth at the expense of sustainability. We are also increasingly aware of the injustices we inherit from the worldviews, practices, and behaviours that have structured the inequalities blighting our societies. More and more people are wondering what we can do to change the economic system that produced these injustices and existential risks. Impact investing is an approach that changes how we think about what returns we want from our investments.
Impact investing describes the attempt to put social and environmental purpose before profit in financial decision making. It starts with the intentions of asset owners, who are trying to work out where they should invest their money. Most investors want to make a financial return, but increasingly they don’t want to have a negative impact. Consequently, they try and ensure that they don’t invest in businesses or enterprises that are damaging to the environment or exacerbate existing inequalities.
But many investors don’t just want to avoid the negatives, they want to use their money to have a positive impact. When they invest, their intention is to find businesses that help society transition towards environmental sustainability, or that contribute to the growth of natural capital. This might be through reducing atmospheric carbon, improving biodiversity, or by increasing soil and air quality. Similarly for social impact, impact investors want to find businesses that are improving individual lives and communities; from health and education outcomes, to improving opportunities and access to capital for minoritised communities. Impact investing gives us a start, but at NPC we want to go further.
Solving complex problems requires investing in systemic solutions
In impact investing, the focus is usually on the individual businesses or enterprise. However, the question many people are asking is how do you invest in fixing a broken system? Here, the impact that you are looking to achieve is not just the environmental or social impact that an enterprise can deliver. Here, the impact is the systems change itself.
Investing in systems change is much more difficult than straight up impact investing because you need to invest in more than just an enterprise. Systems investing requires directing resources towards supporting the transition from one way of doing things to another. The added difficulty is that this may not be financially profitable in the short run. When you invest in transitioning to a system that puts social and environmental purpose before profit, the value created will tilt towards the growth of natural and social capital rather than financial capital. So, what does investing in systems change look like in practice?
Start with the system to find the solution
At NPC we believe that the best place to start is by looking at a social issue through a systems lens. Mapping and understanding the system in which a social issue is embedded can help to identify risks and failures. This includes the financial system in which they are embedded and where market failures are underlying or amplifying systems failures. A second step is envisioning and co-producing elements of an ideal system. Putting the relationships and beneficial social outcomes before weighing the costs, allows you to start to see what a transition from where you are to where you want to get to might involve.
This gets you to a place where you can start to identify the leverage opportunities to achieve the desired change. In terms of the economics of systems change, you can start to see where you might need grant funding; where savings might be found through a transition; where there might be enterprise models capable of making sustainable returns; and where you might need to invest in the supporting environment. This gives you a platform to think about how to convene different kinds of funders to address the complexity of the systems change. One way to catalyse change is creatively using blended finance to combine grant funding and investment capital. This can help with transition costs, uncertainty, or with the trade-off against financial returns from prioritising people and social purpose.
At NPC, we have been working with Rethink Mental Illness to engage in just this process. We are in the early stages, but the aspiration is to find solutions to a system unable to commission and provide sufficient accommodation-based care, as well as support, to meet the needs of people with severe mental illness. We will keep you posted on how this work develops. In the meantime, if you are thinking about what role impact investing might play in changing systems and solving complex social challenges, do get in touch.