Defining Key Concepts in Systemic Investing

Defining Key Concepts in Systemic Investing

As mentioned in a previous post, one of the essential ingredients I believe systemic investing needs to be successful is shared language and definitions. A foundational vocabulary is crucial in rooting various stakeholders in the same concepts, principles, and goals from the beginning. This was something traditional impact investing didn’t do, and is one of the reasons why impact investing has at times failed to deliver consequential results. 

In this blog, I want to offer and define a few initial key words and concepts that underpin our work at Third Nature Investments (we’ll revisit and add to this list over time), in the hopes that others in the systemic investing movement will find them helpful and continue to build upon them.

1. Systemic Investing

Systemic investing is a nascent methodology that looks at the relationships, context, and interdependencies within and across various systems, seeking to deploy multiple forms of capital/resources in a strategic and collaborative way that helps drive true change. Unlike impact investing, systemic investing isn’t about driving enterprise- or even sector-level impact; it seeks system-level impact. Systemic investors transact across strategic portfolios as opposed to single assets, using a polycapital funding architecture, meaning they assess and deploy several different capital options based on the specific needs of an organization (e.g. equity, debt, revolving loan, philanthropic, etc). Finally, systemic investing is marked by radical collaboration, bringing a diverse set of voices to the table including NGOs, researchers, foundations, scientists, etc.

2. Investment

Today the word “investment” often narrowly refers to deploying money in order to gain a financial return later. However, the origin of the word “invest” comes from the latin verb investire, which meant “to clothe.” Embedded in that origin is a sense that investing in something or someone isn’t a superficial transaction, it’s relational. It’s about long-term value not short-term gains. And it wasn’t just about providing money. Similarly, I believe we need to broaden our modern understanding of “investment” to go beyond just dollar figures. For example, investment must also include philanthropy and consider the many forms of capital available (e.g. social, human, political capital) to deploy. It also must reassess what successful “returns” look like (e.g. beyond sales or profitability, what’s the environmental/social/community impact of an organization?).

3. Unlearning

In systemic investing — because we’re seeking to transform entire systems and ingrained ways of doing things — it’s invaluable to have a “beginner’s mindset.” Being too entrenched in the status quo and current state blinds us to seeing the greater possibilities of a future state. Thus we need to “unlearn,” that is to discard from our minds what we think we know about investing, capital, markets, and measuring impact. For this reason, “outsiders” are actually some of the most important people to bring into the systemic investing movement, because they’re not steeped in old models, and naturally bring fresh perspectives and ideas. This is where the sparks of new ideas occur and how transformational breakthroughs happen, moving beyond just seeking to achieve incremental unit-by-unit impact.

4. Venture Building

I’ve never liked using the term “venture capital” to describe to people what we do. To me venture capital sounds transactional (just add capital), and particularly, over these past few years, the term venture capital has come to be almost interchangeable with speculative bets and a desire for “quick wins” using fast money. Instead, I like using the term “venture building” to signal the essentialness of actually building something real and useful — focusing on value first, not valuations. Not just deploying capital, but building durable businesses. Additionally, the term venture building signals the importance of the partnership and relationship required between us and a founder (or founders). We’re on the same side of the table, working thoughtfully and methodically, to build something the right way.

The venture building stage is the ultimate place and point to affect change — to redesign from the start the why, how, and what of a business enterprise. If you can really get this stage right, a company can sync up its positive impact alongside its business activity as it scales. For example, you can address key foundational questions such as: How does it source materials and from whom? What is the impact for the communities it interacts with? What are the impacts on human health and on ecological health? What is the best possible end life for a product?

5. Accounting

In business, accounting is often seen solely through the lens of a profit and loss (P&L) report. This is myopic at best, negligent at worst, as it doesn’t factor in the actual costs of the business. In his 1993 book The Ecology of Commerce, Paul Hawken hits on this point, saying, “Free markets cause harm to both natural and human communities because markets do not reflect the true cost of products and services.” Later to illustrate he says, “American food is the cheapest in the world, but the price does not reflect the fact that we have depleted the soil, reducing average topsoil from a depth of twenty-one inches to six inches over the past hundred years, contaminated our groundwater (farmers do not drink from wells in Iowa), and poisoned wildlife through the use of pesticides.”

Investors need to deeply understand the true costs of the businesses they’re invested in or are considering investing in, and not just passively accept the negative externalities. Our perspective is that if you’re investing in organizations that are doing it the old way (e.g. dumping their trash on someone else’s yard), then you have a systemic risk in your portfolio. We’re building a new type of portfolio that examines the broader nuances of each company’s true and holistic accounting, and focuses on businesses that are able to make money while sustaining the earth systems around us.

6. Impact Measurement

Traditionally, impact investors measured success through narrow and siloed Sustainable Development Goals (SDG) metrics. Additionally, they measured impact through single entities and investments. A systemic investing model diverts from metric-oriented impact to true systems-level transformation. This can be measured by things such as system dynamics, emergent system properties, etc. Additionally, we look beyond the efficacy of a single investment and instead analyze the combinatorial effects across assets, seeking to build strategic portfolios where companies can reinforce each other's impact and lead to greater cumulative effect.

For example at Third Nature Investments, we purposefully work with companies and fund partners (through Third Nature Partners) that often share overlapping missions or areas of expertise. For instance, Atlantic Sea Farms, Sway, and Keel Labs are all part of the “seaweed economy,” whereas Copia, Hungry Harvest, Foodsmart, and Everytable all deal with food insecurity and healthy food access. Because there is overlap, we’re constantly gleaning strategic intelligence from each of them, helping strengthen our thesis for all of them in tandem with our activities on the philanthropic side of these issue areas. This allows us to more effectively plot out true transformation in those respective issue areas as opposed to driving only isolated impact via a single enterprise.