Credit: CIVIC SQUARE — construction of a neighbourhood grow room

Financing sustainability transitions: in search of a new, civic-led orthodoxy

This is the departure blog for the TransCap Initiative’s collaboration with EIT Climate-KIC and Dark Matter, CIVIC SQUARE, ThirtyPercy Foundation, and Lankelly Chase for civic-led systemic investing in the UK. It was written collectively by the team behind this collaboration.

Finance at the Climate Crossroads

Since the signing of the UNFCCC’s Paris Agreement in 2015, $3.8 trillion has been invested in fossil fuels, and much of the money set aside to “build back better” will not address climate change. The role of finance in both the causes of climate breakdown and how we pull our societies back from the brink is a crucial and hot topic that many individuals and organizations pursuing a low-carbon, climate-resilient, just, and inclusive future are grappling with.

While Sustainable Finance has emerged in response and has seen significant expansion over the past decade with a further 55% of growth forecast in 2021, the practice of taking environmental, social and governance considerations into account when making investment decisions is unlikely to lead to transformative change of the kind required. Not only do ESG investments manifest mostly as a “do less harm” exercise with a focus on risk reduction instead of value creation, but they also hardly do better than conventional funds in directing investment to sustainable activities.

The micro-shifts of ESG investing are a step in the right direction but wholly insufficient in the face of the climate and ecological crisis. Mainstream approaches leave much of the prevailing investment logic — the paradigms, structures, and practices of investing — untouched. Incrementalism and tweaks at the fringes of the finance system leave these sustainable investments steeped in many of the same finance orthodoxies that got us to this point of crisis in the first place. Put bluntly, moving our pensions from companies involved in oil exploration to less carbon-intensive industries such as biotech, financial services, or digital technology is not going to drive the transformational changes we need locally and globally. This is why ESG investing has come under increasing criticism in recent months for failing to deliver on its impact promise.

The TransCap Approach

The shortcomings of the Sustainable Finance movement have been noted by many already, not least one of the partners in this collaboration: the TransCap Initiative.

“Transformation capital is an investment logic at the intersection of systems thinking and finance practice. It has been designed to catalyse sustainability transitions in the places that matter most for human prosperity — such as cities, landscapes, and coastal zones — as well as in value chains and other real-economy systems. It recognises the world as a complex adaptive system and embeds systems thinking, human-centred design, and sensemaking in all stages of the investment process.”

Credit: TransCap Initiative — transformation capital white paper

This new investment logic presents a critique of the ESG mindset and argues for why we need to push the world of finance to think beyond the singular goal of investment as a means for capital to multiply itself, and instead to focus on increasing the effectiveness by which Sustainable Finance is deployed. It argues that viewing the world through a systems lens and focusing on real assets in the places where we live, work and play — instead of in stock markets — is more aligned with our shared ambition to build not just a low-carbon but also a climate-resilient, just, and inclusive society.

“Transformation capital intends for investors to deploy capital primarily to create change dynamics that propel a (real-economy) system in a specific direction, both in order to set the system on an environmentally and socially sustainable footing as well as to enable the continued multiplication of capital in the long run.”

How This Manifests Locally

But how does that manifest locally? And how does it interact with those who live within the systems these investments seek to change? How can we better connect the financial system to communities in a way that serves them rather than relegates them to a source of value extraction? How can we ensure relationships move beyond the continued multiplication of financial capital as the primary driving force and instead prioritise wellbeing, social justice, and ecological regeneration?

Conventional investment portfolios systematically avoid opportunities to generate compound value (both private and public) by remaining purposefully divorced from the tangible and intangible assets embedded in communities themselves. Furthermore, they are not composed in a systemic manner through which individual assets can be brought into synergistic relationship with each other so that they generate multiplier effects that amplify their value to the community.

A simple example might be a residential fund investing in a rental portfolio in a neighbourhood. The fund manager knows that the attractiveness of the place and success of the investments are partly based on the sense of community and safety as well as the quality of nearby parks, schools, shops and transport connections. But there is no mechanism or incentive for these connections to be made.

While financial capital is a powerful lever in driving a system’s behaviour, there are other types of capital important to society’s sustainability transition. One of them is “community capital”, which manifests in different ways. It can take the form of the relationships of trust within communities that facilitate coordination and cooperation for mutual and civic benefit. It can be the organisational and institutional infrastructure in which deliberative and decision-making capacity lies within a community and amongst its members. It can even be the combined financial and social investment potential of a community to generate multiple shared values from collective civic action.

Credit: CIVIC SQUARE — #TheBigLunch weekender at The Front Room, South Loop Park, Birmingham

These types of community capital are rarely aligned in a purposeful way with financial capital flows, sustainable or otherwise. And yet these types of capital and human-to-human interactions are the bedrock of real value creation in our neighbourhoods and communities. Worse yet, there has been a historic and turbulent relationship between financial capital and the people and places it shapes. Extractive models of financial investment have bred distrust and often directly contributed to the inequities at the heart of the crises we face. Whether it’s through housing developments that privilege profits over affordable, green and comfortable living for all, or high-street chains motivated by shareholder interests over those of the community, the long term risks associated with these investments are socialised and the rewards are privatised — the 2008/2009 Global Financial Crisis serving as a powerful reminder.

Credit: CIVIC SQUARE — exploring modern construction and renovation methods

As technology advances, these harmful power imbalances risk being replicated further and faster. The incentives, values and ownership models baked into finance will play crucial roles in the means of creation and distribution: how behavioural data from mobile phones, public spaces and smart homes are owned and used; or how Artificial Intelligence is developed and applied to our everyday lives; how gene editing is applied and owned in our food system; or even how social media and other online platforms that breed polarising content, unsustainable consumption patterns and mass disinformation structure their business models. Whatever the scope of the transition, how it is financed matters.

This makes it all the more crucial to see sustainability transitions and the finance that drives them through an economic, political, cultural and social justice lens and recognize that these transitions happen alongside — and not isolated from — other structural shifts in society. In other words, sustainability transitions are not just about carbon neutrality, but rather a need to move away from the prevailing logic of an environmentally and socially extractive economy towards a regenerative and inclusive economy capable of fundamentally addressing the most tangible and pressing challenges of the 21st century. As the Climate Justice Alliance puts it,

“The transition itself must be just and equitable; redressing past harms and creating new relationships of power for the future through reparations. If the process of transition is not just, the outcome will never be. Just Transition describes both where we are going and how we get there.”

Rewiring Capital and Value

Rebalancing this relationship between communities and finance requires more than just new capital formations, new funds and new grant structures. It requires the systemic rewiring of capital itself, away from asymmetric power, control and value extraction, towards more distributed and democratised forms.

It also requires a rewiring of how we see value. Reconfiguring the relationships between financial capital and community capital can unleash the multiplicity of equitable returns and co-benefits, recognising that value flows from investments can take many forms, but too few are incorporated into conventional financing models. Reductions in liabilities, such as the health risks associated with fuel poverty, are rarely accounted for fully. Longitudinal and intangible outcomes, such as increased social resilience from one generation to another, fail to be valued fully when investment decisions are made. The failure to capture these values reinforces a warped view of what constitutes a “good” or “bad” investment.

Credit: Dark MatterBridging the Impact Investment Gap: Infrastructuring Tomorrow

If our finance systems are to go beyond capital formations motivated largely by short term, narrow economic returns alone (financial ROI / social ROI that use conventionally static or negatively biased discount rates), and begin to recognise the multiple civic returns possible, there is a need to explore new ways of measuring, accounting and financing for civic value creation for a new symmetry of power and mutuality. It is in this rewiring of capital and value that we can create the systemic conditions for just transitions.

Our TransCap x CivicValue x CommCap exploration

The intersection of new investment logics (transformation capital), new forms and flows of value (civic value) and the tangible and intangible assets in our communities (community capital) is where our shared exploration sits. It is where we seek to further unpack and explore the tensions and contradictions that their combination surfaces by testing and validating key components of each, and how they intersect.

The aim is to generate insights and learnings relevant to a diverse range of place-based transitions. While the transitioning of, for example, urban neighbourhoods towards a just carbon neutrality and universal wellbeing will be different to transitioning rural land systems towards sustainable and ecologically enriching uses, there will be common challenges and relevant points of connection to draw from.

We have purposefully brought together a collaboration that spans a diverse set of vantage points, knowing that diversity is strength and that to work in complexity is to embrace entanglements and often conflicting perspectives.

The TransCap Initiative is a collaborative space for developing, demonstrating, and scaling systemic investing in some of the places that matter most for human prosperity — such as cities, landscapes, and coastal zones — as well as in value chains and other real-economy systems. We apply systems thinking, human-centred design, and the principles of mission-driven innovation to explore how financial capital can catalyse the transformation of systems in service of a low-carbon, climate-resilient, just, and inclusive future. The TransCap Initiative has been initiated and is currently being convened by Climate-KIC.

Thirty Percy Foundation and Lankelly Chase Foundation are philanthropies passionate about systemic change, climate justice and place-based transitions to a future that is regenerative and just. We have a history of supporting ambitious, values-aligned partners through grant funding, and of challenging systems that enable excessive accumulation of wealth at the expense of social and ecological wellbeing.

Dark Matter

Dark Matter Labs is a strategic discovery, design and development lab working to transition society in response to technological revolution and climate breakdown, focusing on the institutional innovation that sits between the systems and structures that shape society. This includes reimagining new place-based institutions with the capacity for collective sense-making, implementing, and financing of regenerative projects, to re-coding wider value models through contracting in order to harness the potential of placed-based transitions.

CIVIC SQUARE

CIVIC SQUARE is based at the heart of a neighbourhood in Birmingham, we are focused on 21st century regenerative civic and social infrastructure that underpins how we respond together to our growing societal challenges equitably. We do this through our key mission areas of the public square, neighbourhood lab and creative and participatory ecosystem we seek to work in a number of ways alongside our neighbours and local community, making the invisible visible through uncovering the dark matter, investing in the radical reimagination of our systems through the dream matter, and giving it playful, participatory, everyday, accessible form in the ordinary matter.

The strength of this collaboration is that each partner brings perspectives and assumptions that have some common ground but aren’t completely aligned. The point is to collaboratively explore the tensions that arise and, from a position of empathy and humility, work towards reconciliation that can further the cause we broadly share.

Working Out Loud

We want to recognise our privilege in this work and avoid falling into the trap of building a knowledge base in isolation of wider stakeholders, including those within neighbourhoods and communities who will help determine the shape and feel of each place-based transition. Our intention is for this exploration to build upon existing knowledge and inspire a wider ecosystem of stakeholders to continue to develop and test out new ideas in a way that builds a “movement-of-many” capable of displacing dominant systems of investment and finance.

To that end, we will be “working out loud” over the course of this collaboration. Partners will take it in turns to write a WeekNote, sharing learnings as we go.

You can find the TransCap x CivicValue x CommCap WeekNote here.

Our Shared Enquiries

To guide us over the next 6 months, we have co-developed a set of shared core enquiries that capture what we feel are fundamental questions that need further exploration.

  1. How can we best challenge the modus operandi of investors and guide those with aligned intentions towards new logics, practices and instruments adaptive to different contexts, communities and scales of transition?
  2. How can we best build the capacity for change amongst communities, intermediaries and investors that address historical tensions between capital and societal interests, as well as legacy lock-ins that remain deep-rooted causes of the crisis?
  3. How can we best develop new financial, technical and participatory innovations, which not only systemically rebalance the agency of change from financial capital towards community capital, but are transferable / translatable across multiple different boundaries and scales of ownership (e.g. urban neighbourhoods but also rural land / bio-regions)?

What sits behind these three leading enquiries are a set of cascading enquiries that represent our collective “hunches” for where further work could have value.

  • How might we best build the capacity for change amongst communities, intermediaries and investors that address historical tensions between capital and societal interests, as well as legacy lock-ins that remain deep-rooted causes of the crises we face?
  • How might we navigate the tension between urgency for action and the deeper shifts required to deliver equitable systemic change that is grounded in historic and cultural inequities?
  • How might an ecosystem of investors be nurtured to provide different types of capital that serve local, just climate transitions in different ways?
  • How might new investment logics address ownership, wealth and power concentrations that drive extractive models of financing, while supporting new economic thinking relating to revenue, risks and returns?
  • How might “participatory imagining” practices help establish investments with shared intention, in a way that builds legitimacy across all stakeholders involved?
  • How can new ways of measuring the quality of investments drive rigour and legitimacy (and comprehensively account for its multiple benefits beyond financial ROI)?
  • How can minimum viable prototypes, proxies and proofs of possibilities help make abstract concepts and ideas around new investment logics tangible to a diverse group of stakeholders?

Towards Tangible Actions and Longer-Term Proofs of Possibility

As a collective, we are committed to working towards concrete action in the near term, while maintaining a broader perspective for movement-building. Our principles for implementation are set out below:

Short term impact with long term horizons

This initial exploratory phase will inform what can be implemented in the next 12–18 months. This recognises that the time to make the transformational investments necessary is long overdue and urgent, and also that communities want to see positive changes sooner rather than later. But these short term actions must also be deliberate in how they act as steps towards a radically different future, rather than extending the status quo.

Testing approaches at multiple layers of systems

Emerging ideas and actions will focus around investment logics and fund structures, but also institutions and people. Crucially, to support innovation at those levels, ideas will also include innovation of the technical instruments that can enable these new ideas.

Place-focus

Given the very broad ambitions for this collaboration, we plan to initially focus on one place — Ladywood in Birmingham — to help ground our thinking. This is in part because CIVIC SQUARE is rooted here, is working alongside neighbours in the area and has long term commitments to exploring new models of social infrastructure, community retrofit and more in the area, but also because as with many neighbourhoods facing the challenges it is, the transition needs are great. That’s not to say that we won’t be considering other local contexts and types of transitions concurrently and over time.

Matching top-down and bottom-up

We must find better ways of linking finance — which typically wants a standardised model to which large amounts of investment can be applied — with communities, who typically require a bespoke approach tailored to their needs and may need relatively small amounts of capital at a time. We will explore other examples of how this challenge has been overcome and that have been able to deliver meaningful, scaled outcomes.

Creating a long-lasting platform for sustainability transitions

In times of adversity, community capital has a direct relationship to the ability of neighbourhoods to adapt and cope with change. Therefore, implementing the changes required to make sustainability transitions happen will require accountable, empowered and securely-resourced local partnerships or even new institutions to be established. We will explore how these institutions might emerge and also be sustainable over the long term and not be entirely dependent on potentially changeable political agendas.

Get in Touch

If you’re interested to learn more from this collaboration or are exploring similar themes and issues relating to the topics outlined above, please feel free to reach out to our designated points of contact:

TransCap Initiative
Dominic Hofstetter
dh@transformation.capital
@dhofstetter_x

CIVIC SQUARE
Immy Kaur
immy@civicsquare.cc
@ImmyKaur

Dark Matter Labs
Tom Beresford
tom@darkmatterlabs.org
@t_bez12

Thirty Percy Foundation
jen@thirtypercy.org
@jenhooke

Lankelly Chase Foundation
dominic@lankellychase.org.uk
@_dominicbu

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Dominic Hofstetter

Dominic Hofstetter

I write to inform, inspire, and trigger new strategies for tackling climate change.