What does that mean in practice? 

Essentially, you have to look at the challenge of soil carbon sequestration in a much more holistic and mission-driven way than a typical VC might do. Instead of just scanning the horizon looking for start-ups with the most potential to succeed in the marketplace, you centre the challenge. With soil carbon, this was about asking the question: “what will it take to maximise the potential of soils as a carbon sink?” When the starting point for the investment thesis is re-framed in this manner, then another critical element of your approach becomes the identification of what in systems thinking is usually referred to as leverage points. In simple terms, this is about identifying the interventions which have greater potential than others to create whole scale systems transformation. For investors, this effectively translates into identifying where investments can trigger a larger change that becomes irreversible, and where co-benefits and feedback effects act as positive amplifiers. I’ve written more about that approach in venture building here.    

Whereas a traditional investor might start by building a pipeline of start-ups, we began by casting the net wide, researching to understand who the key actors are across the soil carbon sequestration space, what are the biggest challenges, where are the emerging innovation spaces, how do the causal loops flow between these, and so on. And as my research partner-in-crime Poppy Russell examined in her recent blog on soil carbon, this is a messy question and a messy process, in a messy field! To give you a sense of just how messy, check out the pic below of an early stage systems map we did - on the wall of Counteract’s office, using a copious quantity of post-its. 

But out of that process emerged an investment thesis which is transformation led, holds a clear theory of change, and seeks to generate impact at the level of the system rather than just a single asset. Here’s what we learned along the way by taking a systems approach. 

Embrace the mess. This is a tough one, because mess belies complexity and uncertainty when it comes to doing this kind of analysis - and us humans intuitively don’t like either of those things.  Certainly, in the finance world, thinking is typically more reductionist and probabilistic. But if you want to unlock catalytic impact, then getting to grips with complex sustainability challenges you’re looking to address will necessarily involve messiness. Working through that messy, challenging stage of the process is what allows you to make sense of the system as a whole, and identify the most important leverage points for transformation. 

Always be scanning the horizon. As a systemic investor, you need to be proficient at observing emerging trends and drivers of change in the system, and making sense of new patterns that emerge. This is a constant, dynamic practice which opens a window into the potential future pathways for your market, and allows you to sharpen your investment strategy for greater impact. It is best done as a collaborative activity that taps into the collective intelligence of groups. We did this as a team at Counteract, but also by consulting a range of stakeholders across the soil carbon ecosystem. This aspect of the process allowed us to identify the fundamental drivers of change in the soil carbon marketplace (e.g. physical stresses of climate change on agriculture, soil degradation due to industrial agriculture), as well as the more micro trends shaping this space in the short-term (e.g. policy momentum around soil carbon sequestration in certain countries, growth in voluntary carbon markets). This, in turn, helped us define investment priorities. The construct of drivers of change and future trends also continues to act as a ‘wind tunnel’ which can be used to stress-test potential investments by thinking through how resilient specific investment opportunities will be in the face of these developments.   

Expand your reach. What is important is not always investable, but might well be critical to you as an investor in a particular market. A prime example in the soil carbon space are the verification standards. They are a fundamental barrier to the scale up of soil carbon projects because there isn’t a single unified standard: a Carbon Plan analysis recently revealed that more than a dozen protocols exist, and they vary across key dimensions like scientific rigour, additionality, and durability.  Yet they are by no means exogenous to investors in soil carbon solutions, because they influence the confidence with which buyers can claim they are buying good quality soil carbon credits. So, the question becomes, how can you as an investor stretch the extent of your understanding and action into spaces which aren’t traditionally seen as core to investments, but are really fundamental to catalysing or growing your marketplace? Sometimes this is about communications campaigns that fill a market gap for information, sometimes about unusual partnerships, and so on.

Question your lens. What we found through our analysis is that, the further we went, the more we realised that we needed to redefine the purpose of the system as we were thinking about it. Yes, soils are our land-based carbon sink with the greatest sequestration potential according to the IPCC. But, fundamentally, for the people who manage a good proportion of our soils - in other words, farmers - it’s typically not about carbon. Understanding soil carbon sequestration from the lens of agricultural land management means considering everything from soil health to biodiversity improvement, to watershed management and the nutritional value of crops. In many ways, that is the beauty of soil carbon sequestration: it brings so many co-benefits, which is what a systems analysis can really help highlight. Realisations like this also led us to go beyond agricultural practices and consider thus far relatively overlooked innovation spaces, such as belowground forest ecosystems and the influence of microbes on soil carbon sequestration. 

Follow the causal loop road. Identifying how the different elements of the system link together, and what elements are the fundamental drivers that have a ripple effect across the system will help you understand how to unlock change. To give just one example of this, our systems analysis of soil carbon was repeatedly leading us back to the point that a lot of the catalysts for soil carbon sequestration are dependent on the uptake of regenerative agricultural practices, which is currently low. There are many reasons for this, but when we dug into that topic a bit more we realised one of the key ones is that it is financially difficult for farmers to make this transition. So, even though your starting assumption about building an investment thesis around soil carbon might well be that you’ll be investing in soil carbon sequestration, a systems analysis shows that a critical precondition for doing so is innovative financial instruments that de-risk the transition to regenerative agriculture for farmers. One example of this is the Perennial Fund, a regenerative agriculture transition vehicle which provides farmers with financing and guarantees them a wholesale customer for the regenerative products. 

Talk to unusual suspects. As a VC fund, you might be used to scanning the space of start ups, but there is a whole network of actors working in a particular system who might be catalysing the innovation you want to see. One of the key barriers for the scaling-up of soil carbon sequestration is accurate, cost-effective ways of measuring the amount of carbon in soils. There are no doubt many start-ups innovating in this space. But taking a systems approach to the analysis allowed us to identify other actors whose work might be critical to the development of the whole ecosystem even though they are beyond the investment remit. One example of this is The Soil Inventory Project, a non-profit building an affordable, decentralised measurement system that combines the accuracy of field data with the scalability of geospatial models. The estimated price of a kit starts at $250 and includes hardware, sample design  and carbon measurement analysis—a cost significantly less than paying companies to send people to farms to collect and test samples.  

If you are centring catalytic impact in your investing, a systems lens is critical, because that is what can help you unlock transformational change. Just picking isolated winners in your pipeline won’t. We need to move away from an asset-by-asset mentality to a more strategic approach to building investment portfolios, one which is designed to act on transformational leverage points and unlock combinatorial effects between them.