From funding projects to funding portfolios
What would a fund for systemic interventions look like?
UNDP is currently exploring mechanisms to shift from a logic of single, ad-hoc interventions to one of portfolios, driven by theories of change grounded in systems science. In Indonesia, Pakistan and Thailand UNDP partnered with the Agirre Lehendakaria Center to build Social Innovation Platforms (SIPs) for post-Covid economic recovery. In Zimbabwe, a data-driven systems portfolio is being devised to measure the magnitude of the informal food sector in urban environments, and use that information to provide economic actors financial access. As part of the deep demonstration program, UNDP country offices, from the Dominican Republic to Burundi are designing portfolios to tackle complex development challenges such as the recovery of the tourism sector or the prosperity of border communities. As part of this initiative, in Vietnam UNDP is uncovering the systems implications of a Circular Economic Rebound in the wake of COVID, including developing interventions focusing on redesigning mission oriented institutions, rethinking economic impulse and investment, exploring implications of a just transition as well as creating collaborations and coalitions for change.
Systemic development alters the way public value is defined and created through five mechanisms:
- It seeks transformative rather than incremental outcomes.
- It recognises that there is not one “silver bullet” solution to reach development outcomes. It is the combination of diverse interventions addressing multiple leverage points which ultimately provides pathways to address the complex issue at hand.
- It enforces listening. Solutions are not proposed by unaffected actors; they are built while consulting, involving and empirically testing ideas with stakeholders too.
- It accepts uncertainty and welcomes adaptation. Each systemic intervention uncovers new information, which is to be used to adapt actions and create new ones.
- It does not discriminate against a long term perspective. Changing systems requires action that may not feature immediate effects.
Yet, as a recent Catalyst2030 report reminded us, systemic development struggles to be implemented and tested at scale as conventional financing mechanisms are not tailored for the paradigm.
Most development finance is biased towards single-point interventions and project finance. Operators deploying systemic interventions are thus compelled to coalesce around the single-point narrative, risking to miss the systemic approach along the way.
Development finance is also quite monothematic in the instruments it uses. Though actors are increasingly aware of the issue, development financing efforts are still skewed towards grant making. Systemic interventions, however, often entertain the concerted use of a diverse ecosystem of asset classes which may include not only different types of grants, but also return-driven categories such as equity investing, credit or infrastructure investments.
And most importantly, systemic development needs high degrees of independent decision-making in how to allocate resources. Rather than leaning on donors guiding priorities at the portfolio level, it is up to operators (and their stakeholders) who have deep contextual knowledge to define what interventions deserve resources, and in what forms. Operators should be, de facto, systemic investment strategists and managers.
Giving systemic development an institutional muscle
The experience of UNDP’s deep demonstrations is making it evident that systemic development needs an institutional muscle that translates systemic interventions design into action, moving beyond individual projects as the mental and operational framework of reference (which does not mean however dispensing from projects). One way to bridge the gap is the creation of Systemic Funds, financial institutions that accommodate the nature of systemic portfolios and their operators.
I think of a Systemic Fund (SF) as a pooled investment fund with the mandate and intent of allocating resources to systemic interventions with a multi-asset strategy for development.
Let me break down the definition to understand the concept better.
SFs are pooled investment funds. By that, I mean SFs are expected to manage a pool of donor/investor money, akin to how other realities (e.g. venture capital, private or public equity funds) operate. Several like-minded institutions interested in tackling a complex issue such as, for example, waste management through a systemic lens would have the opportunity to pool their resources together and scale the actions of systemic interventions.
SFs have mandates. Mandates refer to a common understanding and shared intent between investors and fund operators on how and on what the capital is being deployed. A mandate may include a specific topic of geography of interest (e.g. food security in Thailand). It also, and very importantly, implies independence. SF operators would have the full trust of their investors, thus allowing them to allocate resources to systemic interventions according to their strategies.
SFs have a multi-asset strategy. SFs must be able to flexibly deploy capital on a wide range of assets through a wide range of instruments. As mentioned, an effective systemic development portfolio of interventions may well include policy interventions financed by grants, credit to economic actors and infrastructure projects. While in mainstream finance multi-asset strategies are not uncommon, the same cannot be said in development, with some notable exceptions that are going towards that direction (e.g. the Gates Foundation’s institutional umbrella being able to deploy grants and strategic investments). Whatever the ultimate shape of systemic financial interventions, we must normalise and integrate multi-asset strategies.
This concept paper elaborates more on the Systemic Funds, on some of their inner workings and on three scenarios for turning them into a reality within the UNDP’s institutional framework. In the months to come, we will test and hone SFs against reality by partnering with like-minded donors to actuate first versions of them for some of the most promising systemic interventions designed by UNDP and its partners.
The world needs a redesign of the financial institutional framework to deliver public value, at scale. Should your organisation align with this vision, I would love to hear, learn from, and build with you.
With thanks to Marcos Neto, Lorena Sander, Ida Uusikyla, Shamiso Ruzvidzo for their comments.
Stefano Gurciullo is an investor and complex systems scientist. He is Partner at Redstone, a venture capital management firm, and has spent a decade working across financial stability and risk, sustainable finance and long-term finance. He holds a PhD in Financial Computing from University College London.