Having intentional impact through investment in an innovative company is great, but if it operates in a silo, its power for change is limited. A ‘systems-approach’ looks first at the problem, it explores what needs to change within the system, and then drives a decision on the best intervention, and the capital allocation that would be most appropriate.
This is the theory behind Regenerative Finance, an approach developed by Tim O’Brien, CEO and founder of Purpose-Made.
Tim O’Brien has the entrepreneurial experience to make it work. He’s launched; Hatched – a design and strategy consultancy, Rooy – an impact measurement technology platform, and The Carbon Bank – a farmer-led carbon management and supply chain analysis company.
In launching Purpose-Made, he’s bringing them all together to drive real impact.
A Consortium of For-Purpose Businesses
Tim is a serial entrepreneur, he’s launched a string of businesses, but they have one thing in common – they all have purpose at their core.
“The common thread throughout all of that is asking; where are those big challenges that we need to put energy into to solve. Purpose-Made is all about purposefully making stuff that will actually have a massive systemic difference.” Tim says.
“Setting up Rooy and The Carbon Bank was very natural and organic, almost accidental. We just saw this massive gap in the market, both in terms of a business opportunity, but also in terms of impact opportunity.”
Purpose-Made will subsume the work done with another of Tim’s businesses, Hatched, and it will operate as an impact strategy consultancy that’s laser-focussed on finding solutions to some of society’s most challenging problems.
Big challenges need big solutions, but it also needs new thinking. Purpose-Made is founded on ‘systems-thinking’, and when it comes to impact investing they want to think bigger, to look at a complete system, rather than just the impact of one discrete portfolio company.
They call it, Regenerative Finance.
Impact investors will often identify a key challenge or investment thematic, and best practice involves defining a theory of change. This is then used to identify companies that are contributing to solving this challenge.
But often, it neglects to look at the problem from a systems perspective.
“You’re tending to invest in one organisation to help scale it up and grow. But what we want to do is look at the whole needs of the system, that Regenerative Finance. You’re not looking at each individual investment, you’re actually starting with the system and saying, what can make this change happen, and you start to look at that and find the players or the gaps that sit within it, and then look at the financing needs of that system.” Tim says.
“The process might tell you there’s a number of things that need to happen beyond investing in just a solar company or an analytics company. You might need to capitalise six to seven, or maybe 10 things. But most importantly, they may have different financing needs – some may be an equity investment, others might need a loan, others might need just money to fund it as a grant, or there may be a capacity building exercise.”
While the model does focus on the system as a whole, it also needs to consider the portfolio, and balance the returns a particular firm is targeting.
Tim was hesitant to say it was simply an ‘impact first’ approach, instead, he argues the market needs to shift their mentality to recognise that a broad thematic, that covers challenges across an entire system, offers not only impact benefits but also returns opportunities as it covers a broader investable universe.
Changing the System
It all comes down to intention. Impact investors, by definition, have an impact outcome in mind, but as the sector evolves, Tim and his team are receiving feedback that investing into individual companies isn’t having a big enough effect.
“These groups are recognising that they need to do more. They say, I’m investing in these organisations, it’s working, I’m getting a return, but I know it’s not changing the system. So how can I do more to catalyse the change in that system, because that’s what I’m in this for. And obviously, I also want to drive returns to make it sustainable.” Tim Says.
“An example is the ‘just transition’ to clean energy. There’s a lot of investment going into solar technologies and analytics infrastructure, but the speed with which that’s happening is leading to risks around inequity being created by that investment. Investors are saying, I want to do more.”
All progress happens in the grey area; a black and white solution will most often be too simplistic. Purpose-Made don’t restrict themselves to only serving impact investors, they work with everyone.
“We’re looking beyond the impact investing space, we’re finding governments in particular, councils and big corporations who recognise some big issues, but it’s not being addressed, and in fact it may be getting worse. Issues as diverse as mental health, or road safety, these things are accelerating, and they can’t be addressed with normal tools. They’re coming and saying, we need a different approach. So we identify what core things are happening in that system, and then look at ways to finance those. I guess you could call it impact-first, but it’s actually going back to first-principles and applying finance in order to help make that change happen.”
Measuring Outcomes, Not Just Outputs
A further problem, within the problem, is the challenge of meaningfully measuring the positive outcomes of an intervention. It’s not enough to measure outputs, you really want to understand how you’ve improved the wellbeing of a defined set of beneficiaries.
Impact measurement has long been a challenge, and this was the genesis for building Rooy.
“I was at the Social Enterprise World Forum, and it was like, no-one can measure this stuff. Measuring some of those key outputs is important, that’s a great place to start, but the reality is, you need to track the end-state that you’re trying to drive towards, or at least the indicators of that state you’re driving towards.” Tim says.
“And so we built a framework that said, outputs are not enough, you want to drive outcomes, so let’s start with these lead indicators.”
It’s no easy task, and most often it’s a bespoke framework.
“There’s a design piece to work out the core indicators, and then making sure you’re tracking the outputs, and then feeding that back into the system.” Tim says.
“There’s a real art to the design of those metrics, and then the technology just collects that data in the field, to then feed those insights back in. And once you see that difference, it’s transformative”
Tim will be speaking at the Impact Investment Summit 2023, so come along to hear him present his ideas around Regenerative Finance.
Live and in-person, 30-31 March at the Sydney International Convention Centre, all the details are here.