Private Capital: A Systems Thinking Perspective

By Mike Field, Vikāra Institute and Matt Ripley, The Good Economy

Effective market systems are an essential component of a society's ability to manage risks and take advantage of opportunities. Specifically, these systems support society by harnessing natural and human resources to develop technologies, products, and services that mitigate/neutralize risks and improve citizens' wellbeing. But, to be healthy and useful, these market systems must be able to identify, prioritize, and allocate resources in response to societal needs/wants/interests, including issues and risks that are deemed important to society. To do this, market systems must listen to signals from the broadest part of society, particularly the mid and lower-income segments, in relation to issues such as food, health, weather, housing, education, and other things they buy/use.

But, from a system thinking perspective, it has become clear that for most societies, slower-moving emergent risks often get ignored by these identification and prioritization processes, which means minimal resources are allocated. As a result, effective technologies, products, and services are not developed and brought to market. Additionally, when these slower-moving risks like climate change, inequality, and health challenges are ignored, risks are compounded overtime. More specifically, by the time these slower emerging risks manifest into real dangers/problems/damage societies struggle to manage and recover from the combinations of intertwined challenges.

While identifying and prioritizing what society deems important is a necessary aspect of a healthy market system, these systems still need to develop, test, produce, and sell products and services that society wants. This critical function of adequately allocating resources is paramount to a market system’s ability to truly add value back to society. Financial services market systems, especially private capital, play a central role in allocation processes.

Private capital’s inability to identify and prioritize slower-moving risks has become increasingly relevant as investors realize that they may inadvertently be accelerating how risks manifest into actual harm by focusing on short-term returns. Evidence is emerging that when the market and its interconnected financial services market systems ignore slower moving risks and do not integrate them into their return calculations, longer-term competitiveness, inclusivity, and resilience of market systems and society will be negatively affected.21st Century Investing: Redirecting Financial Strategies to Drive Systems Change by by William Burckart and Steve Lydenberg According to Burckart and Lydenberg, investors should focus more on the paradigms in operation at the system level and the patterns and models that underpin how systems function. The thinking is that when investors envision what alternative paradigms would produce fewer problematic results and lower the risk profile (not just their risk exposure), they can make better decisions relative to long-term competitiveness, inclusivity, resilience, and, as a result, financial returns. 

With a clear definition of both old and desired new paradigms, investors can develop specific goals and milestones to track their progress. However, systems-level investing requires a framework and set of measures for understanding systems-level health and resilience, something that impact frameworks are not yet well equipped to do.https://www.weforum.org/agenda/2021/06/esg-resilience-investment-environment-social-governance/  While progress is being made towards standardizing investment-specific disclosures – on climate, nature, and inequality – these essentially provide a static snapshot of how systems are functioning at a given moment in time rather than a more dynamic view of the direction in which the system is evolving.

Therefore, investors are becoming more mindful regarding the effect their actions have on the competitiveness, inclusivity and resilience of these systems in either a positive or negative way. Systems-level guidance on the long-term health of a system is critical to adequately mitigate and manage risks resulting from slow-moving mega-trends such as climate change, biodiversity loss, rising social and economic inequality, and decreasing trust in democratic institutions. However, the current ways in which private capital and especially social/impact investment frameworks are constructed, including how sustainability impacts are measured, are very narrow. These often focus only on specific business practices and products rather than the features of business models and investor activities, and how these impact on societal structures and behavior patterns.  

Running from May 9 - 19, 2022 the Market Systems Symposium will focus on the risks related to climate change and conservation and how market systems, such as financial services market systems, identify, prioritize, and allocate resources concerning emergent risks from these environmental challenges.