Interview of the Month: Dominic Hofstetter
Next week SFG’s Managing Director will attend the Systemic Investing Summit in London hosted by the TransCap Initiative and TWIST to meet with a community of people interested in creating systemic change in financial and economic systems. In advance of the Summit, we took the opportunity to chat with the Executive Director of the TransCap Initiative to learn more about their work and systemic investing.
1. For those in our audience who are not familiar with your organization can you provide a quick overview of your mission and work?
Absolutely! The TCI is a non-profit innovation initiative. We’re based in Switzerland but operate with partners and on projects around the world. Our mission is to build the field of systemic investing—which I can expand on in a second—and we do that by conducting research, running prototypes, and doing all the other stuff that goes into field-building, such as convening, training, and advocacy.
2. As you said, let’s take a moment to expand on the concept of systemic investing. There are already a lot of terms to keep track of in this space – responsible investment, sustainable finance, impact investment, regenerative finance, and now systemic investing. What exactly is systemic investing? How does it relate to those other terms and how is it different or unique from those concepts?
Perhaps the best way to think about systemic investing is as the next stage in the evolution of impact investing. What impact investing is great at is financing single-point solutions: a single company, technology, or project that improves a particular social or environmental metric, such as reducing carbon emissions from a power plant or delivering education to children in a school. But what impact investing has not been designed to do is catalyze the transformation of entire systems: energy, mobility, and food systems, cities and supply chains, landscapes and coastal zones. Transformation is typically the result of a great many things happening within a system, including new technologies, business models, policies, regulations, educational models, and social norms; and all of these have different financing needs, ranging from market-rate and concessional investment capital to philanthropy, public-sector subsidies and tax incentives, corporate supply-chain finance and advanced market commitments, insurance capital, and carbon markets. And this is where systemic investing makes a unique contribution, because what’s needed from a finance perspective to transform systems—i.e. coordinating different kinds of capital from different sources into a plethora of companies and projects in a highly strategic manner—is exactly what systemic investing is designed to enable.
3. You have been demonstrating systemic investing through prototypes. Two such prototypes were deployed right here in Switzerland on food and mobility systems. How do you choose which prototypes to pursue? What did you learn (or are learning) from these prototypes? What does success look like?
The TCI is an innovation initiative, so the main goal in all our prototypes is to learn about what works, what doesn’t, and what needs to change in terms of the theory and practice of systemic investing. Food and mobility are great systems because they are beautifully complex but also relatable—all of us are “nodes” in these systems whenever we take a train or eat a hamburger. In terms of what we’ve learned, here are three key lessons. First, capital doesn’t flow strategically in these systems. You’d be hard-pressed to find investors who can articulate the impact thesis behind their investments in relation to a transformative vision, a theory of change, or a multi-lever intervention strategy. Investors deploy money into single-point solutions, looking to change a static output metric rather than the structure or dynamic of a system. Second, nobody has a clue about a system’s true financing needs. How much capital, of what kind, and provided in which ways will be needed to enable the Swiss mobility system’s net-zero transition or the Swiss food system’s transition toward regenerative agriculture? Nobody knows—not the government, not foundations, and certainly not banks and impact investors. And this isn’t just a data problem—there’s not even a methodology to make sense of that question. So it’s no wonder that we observe a lot of over- and under-allocation of capital; that investors deploy what they know how to deploy or have access to, irrespective of whether that’s the asset class most needed to catalyze a system’s transformation. And lastly, capital flows are poorly coordinated. When’s the last time you’ve seen the finance department of a city government work hand-in-hand with local banks, pension funds, foundations, and investment managers on coordinating investments in service of the city’s climate action plan? … exactly! One problem here is that we lack the “infrastructure”—the tools, the methods, even the language—for working across the public, private, and philanthropic sectors in long-term strategic partnerships. That’s something we’re working on at the TCI.
4. Fantastic, that is something we are working on as well here at SFG in our local community! Zooming out to the global context, the current global political climate is increasingly polarised, with rising nationalism and increased resistance to social and environmental progress. How do you see these political dynamics shaping the future of investing?
These developments are bad news for sustainability overall, and our field won’t be insulated from negative repercussions. But systemic investing actually offers a glimmer of hope. That’s because nationalism often goes hand in hand with fiscal austerity, and as governments cut back on spending on environmental and social causes, it’s even more important that other sources of finance flow in ways that are both strategic and coordinated.
5. If you had a magic wand and could change one thing about the current financial system, what would it be?
I’d make investors ditch the single-asset paradigm in favor of a strategic portfolio approach so they would no longer deploy a single asset class into isolated projects but work across the capital spectrum to invest in a myriad of companies, projects, and social enterprises that are strategically and synergistically linked. To some, that’s utopia, because it’s not at all how finance operates today. Except there are some high-profile investors already operating that way, and we expect a lot more to follow suit in the coming years as the insufficiency of the single-asset paradigm becomes more and more obvious.
To learn more about systemic investing and the TransCap Initiative, check out their website or read their white paper.
