Three ways to invest smarter to save our planet

Tackling climate change and protecting biodiversity demands new principles, tools and metrics to finance long-term system change and the transition to sustainability. Johan Schot, Roberta Benedetti del Rio and Jenny Witte explain how transformative investment work

Impact investment can often target isolated symptoms of our planet’s problems, such as global warming. But to tackle our interrelated crises – climate change, biodiversity loss, growing inequality and social tensions – we need investment that addresses the underlying causes.This demands transformative investment, a new approach we argue for in our recently published report, which sets out how fresh thinking can finance long-term system change and the transition to sustainability.

Historically, investments in systems of provision – water, food, energy and mobility – drove change. In the 19th century, vast public and private investments created Europe’s rail infrastructure – and in doing so, transformed the continent’s economy, physical and social mobility, food and energy systems and resilience.

Capital and investors can generate significant long-term impact. But in this critical decade, simply investing more will not change things with the scale and urgency to turn the tide. What makes the crucial difference is how we invest.

Rethinking the system
Our group includes international historians, sustainability-transition scholars and public and private investors. A Transformative Investment Philosophy offers new principles, tools and metrics to finance system change and a deep transition to sustainability.

By system change, we mean a transformation on a scale to match the Industrial Revolution. Leading scientific bodies including the Intergovernmental Panel on Climate Change (IPCC), the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) and the International Resource Panel (IRP) are demanding change on this scale to address climate change, resource depletion, biodiversity loss and growing global inequality.

We need system change; our societies are built on and depend on principles and rules established during the Industrial Revolution. These include fossil-fuel exploitation, linear production, mass consumption and dumping waste.

We cannot transition to sustainability while these unsustainable principles dominate our everyday lives. There is growing awareness that finance and investors will play a decisive role in delivering system change.

A report published last year, presenting the ten most critical climate research findings to inform discussion at the COP27 climate summit, named “private sustainable finance practices… failing to catalyse deep transitions” as a major barrier to the sustainability transition.

Impact and environmental, social and governance (ESG) investments are increasing and yielding some positive change. However ESG investments favour working within existing systems over delivering deep and fundamental transformation.

This reflects current investment practices’ rigid structures, narrow focus and twisted incentives – all constraints impact investors’ ability to deliver a lasting change.

Fresh approaches
Our Transformative Investment Philosophy sets out three main challenges for public and private, institutional and impact investors to deliver system change:

• Invest in system change, not in “impact”

Let’s take the food system. Impact investing funds smart farming or precision agriculture that may have positive effects, perhaps making production more resource-efficient. But that approach retains underlying – unsustainable – principles of mass production and overconsumption, digging them in deeper.

Investing to change our food systems would fund a long-term transition towards organic or regenerative agriculture, boost local supply chains and develop new food types.

Or take sustainable energy. Impact investment in renewable energy is crucial. But swapping fossil fuels for renewables is not system change, which demands reducing energy demand and giving power back to the people.

Investing in decentralised energy repositions consumers as prosumers, helping to produce renewables. New incentives that value renewables will drive new user preferences to deliver a long-term transition.

Or take transport. Many see e-mobility as the way to transform our mobility systems. Private ownership of electric vehicles is not the answer. It reinforces privilege and status for those who own private vehicles.

Transformation would end cars’ domination over mobility systems. Transformative investment would accelerate shared mobility services and expand public transport, making these convenient, safe and affordable alternatives to owning a car.

• Act together to deliver transformative investment

Public and private investors must work together, and bring in other actors; corporations, policy makers and users. Building up investment portfolios with funding to change multiple systems would have the biggest long-term impact.

An investment firm that invests in electrical vehicles might also invest in shared-mobility service providers and partner with public bodies to support this and engage users. The investor builds up a set of investments to enhance its systemic impact. Investors evaluate and assess these portfolios to spot new ways to transform transport systems.

• Create the tools to target, measure and monitor transformative change

We need new tools to check our progress and experience to support case studies, best practice. This is what grows a community of practice. Investors need to assess how each investment supports and accelerates – or hinders – systems change.

We propose 12 principles for transformative investment that provide a framework for investors to review their own processes and work towards system change (see box). The principles apply system-change thinking across the investment lifecycle, from investment goals to strategy and from process development to sharing and learning.

They aim to inspire public and private investors to see themselves as agents of change and work in partnerships to lead it.

As our 19^th-century railway expansion shows, investments have accelerated radical long-term transformation in the past. We have reached a watershed; what we do next will decide whether we deliver breakdown or breakthrough.

The Deep Transitions research project strives to make transformative investments the norm. We will soon launch the Deep Transitions Lab, uniting private and public investors with academics to try out practical transformative investments.

Johan Schot is a professor of global history and sustainability transitions at Utrecht University Centre for Global Challenges and founder of the Deep Transitions research project.

Roberta Benedetti del Rio is an impact investor, senior advisor to Just Climate and co-chair of the Deep Transitions Global Investors Panel.

Jenny Witte is a communications officer with the Deep Transitions research project.

This story was first published in The Environment magazine in May 2023