The extent of debate (and often disagreement) about the definition of social impact investment is fascinating – exploring in great depth the nuances and prerequisite principles for investing in a way that seeks both positive social outcomes and financial returns. But this discourse risks being divisive and self-defeating. Does this complexity actually attract or repel new investors from engaging in this exciting market?
Inspired by this documentary on risk takers featuring Elon Musk, the South African born founder of PayPal, Tesla electric cars and SpaceX, I have renewed respect for the visionaries who just get on with showing others how amazing things are possible. General Colin Powell once said “Great leaders are almost always great simplifiers, who can cut through argument, debate, and doubt to offer a solution everybody can understand.”
I don’t think General Powell would approve of how we are explaining social impact investment to the masses – and this possibly reveals why most people don’t know anything about it.
Earlier this year I was delighted to be invited by the World Economic Forum (WEF) to attend a roundtable discussion in London, the topic was to explore how to mainstream impact investing. It was duly attended by the good and great, indeed it was a high quality discussion and I walked away with new friends and fresh insights.
But during the day of discussions, the voice of my business partner Rupert Evenett circulated in my head. He rightly says that most frontline social purpose organisations (from charities to entrepreneurial social enterprises) really don’t care where the money comes from – as long as it is legal and above board – they just need more of it to improve the amount of social good they can deliver. An intentionally provocative point.
Yes of course, the funding must be appropriate – sometimes grant funding, sometimes equity investment and sometimes loan finance. But the point is a simple one, it really doesn’t matter what it’s called and whether it’s branded as social impact investment or not. What these organisations do care deeply about is how easy it is to access funding and whether the terms are appropriate for what they need the money for.
In the wrap-up of the WEF event, I reflected on the day’s discussion and on the fact that it was still not possible for everyone in the room to actually agree what social impact investment is. I made the point that ultimately investment is about risk and return. We should avoid making social impact investment seem more complicated than necessary by waxing lyrically about the complexities of impact measurement.
If we really want to make it go mainstream then we need to describe its characteristics in the language of finance – risk and return. Simple.
Risk and return
The risk of social impact investing is still perceived to be high, but nobody can honestly say what it really is beyond a few anecdotal facts from a handful of deals they know about, or quoting from a report that was written with some inevitable bias. The reality is that we need to improve the time-series data available on deals. “Data unlocks investment capital” as my colleague Rupert likes to say. Transparency will cut through the uncertainty and reveal what the real risks are – and I’m willing to bet that it will be lower than many think.
What about the second dimension of finance – returns? There is certainly great debate about whether social impact investment can deliver market rate returns or whether a trade off between social and financial returns should be expected, or even be a necessary precondition.
Enjoying the opportunity to provoke debate, at the end of the WEF event I suggested to the group that perhaps the creation of positive social outcomes could be seen as a proxy for future long-term financial performance. Or explicit positive externalities to frame it more in the language of finance.
By this I don’t mean maximising financial returns, but I do mean an indicator of broader financial attributes, such as resilience to uncertainty and therefore – being inherently about delivering social value and also probably more likely to be valued by society – able to suggest better ability to resist unpredictable economic shocks or other financial speed wobbles.
The room looked back at me without comment – in fairness I did make this point at the end of a long day.
Creating long term value
A few months later I attended a debate about the the European Commission’s Green Paper on long term financing – for example, the financing of major infrastructure projects or SME investment tied up for 10 years. I pointed out that the poor liquidity and by definition long term nature of this market segment closely resembles the social impact investing market.
I asked the speaker (from a large multinational asset manager) how they evaluate their long term investments during the course of the investment period. How do they know whether the investments are doing well or not? Leading to the obvious decision about continuing the investment programme or quitting the deal.
His answer surprised me. He said they increasingly ask what their investee organisation actually do in the real world. In other words, what their social value to society is. Now this is not explicitly a metric of social outcomes as many social impact investors would see it, but it does support my assertion that social impact indicators could – and do – serve as proxy indicators of financial performance.
Mainstream asset allocation
If we are going to stand a reasonable chance of mainstream investors deploying more capital in the form of social impact investment, then we need to make sure it is easier (not harder) to make it part of their day-to-day asset allocation decisions. This objective is shared by the European Investment Fund with their Social Impact Accelerator – a pilot to explore how more private capital can be leveraged along side public capital in creating a more vibrant and higher volume capital market for social impact investment.
To follow Powell’s guidance, we need to simplify the narrative of social impact investment and tell the story in the terms that capital markets understand – namely risk and return.
And to make it even easier to understand, we should call social impact investment by the name that has the most chance of attracting mainstream investors – investment – and let the rest have complicated nomenclature such as ‘impact agnostic investment’ or ‘socially useless finance’ as Lord Turner refers to it.
–
With this spirit of intense pragmatism in mind and a simple desire to see a better capitalised ecosystem of organisations that explicitly do good for society, Rupert and I are building EngagedX, a financially orientated index and data platform for social impact investment. The presentation below explains more about our EngagedX pilot and what we plan on doing next. It is an evolution of the material I used in a lecture to MBA students at Oxford University Saïd Business School. Enjoy – your comments and dissent are welcome!
Karl H Richter 
Very interesting reflection. To me it seems undeniable that in the short term and in a narrow focus there is always a conflict of interest between different stakeholders in an enterprise or a public service. The users want higher quality, the workers want higher wages and the funders or investors want cheaper costs. However looked at more broadly there is something of the prisoner’s dilemma here. Taking a narrow focus there is a trade-off between the social return and the individual financial return, but more broadly this conflict lessens because social investments internalise externalities – i.e, each investor benefits from a social return as well as his/her individual financial return.
For example when you pay your taxes and these provide a subsidy for your local bus service, you don’t have to buy a car and you can get to work more quickly. You may also live longer and more healthily. Investor in that bus service might in the short term benefit from cutting frequencies to the minimum, but if they do, they will lose the health and decongestion benefits they share with everyone else. So they need to factor these shared benefits into their ROI. Are these the sort of proxies you have in mind?
What perplexes me at the moment is that impact measurement seems to be eating its own tail – calculating SROIs seem to have become discredited as either too simplistic or simply a money machine for consultants. We have to have some method of estimating social return that is more sophisticated that whether it will fly politically. This project seems to have got bogged down in its own technicalities.
Concentrating on the investment angle for/in organic, low-geared, third sector organisations…
It should be similar to a student loan, if/when the organisation trades over a certain level then investment becomes repayable, social loan finance intermediaries are not considered a risk-appropriate method of raising equity for all small to medium organic NFPs in the Leicetser area that are run by people who have experienced the social problem(s) the org is set-up to mitigate/eradicate. The Big Society & it’s ‘happy banks’ take note, you have further segmented the third (social ie. communal) sector, as well as constricting a majority the previously available gov. funding, there were already social finance intermediaries, the council’s themselves !! A cynical waste to form new entities. I understand there is a recession but this still represents a FAILURE that has caused many social entrepreneurs I assist in an administrative capacity quit the sector
entirely and either cease or drastically reduce their quantifiable, positive, social outputs in Leics.
Regards, LCMP CIC & Co-operative