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Social impact investment on the global agenda

Written by Maurice McLeod
October/November 2014

Social purpose and financial gain have not always made comfortable bedfellows. Many of those working towards changing society have long been understandably suspicious of investors whose prime motivation is to turn as large a profit as possible.

But the evolution of using corporate money to improve the world we all live in has meant that terms like ‘corporate social responsibility’ and ‘triple bottom line accounting’ have gradually worked their way into the public consciousness.

Globally there are a number of types of organisation and movements which have historically supported social investment. These include: Community development finance in the US, the cooperative movement in Europe and credit unions in Canada.

Social impact investment might not be the catchiest of names but the principle is straight forward.

The aim is to encourage investors to put their money into projects which will not only provide them the return on investment they need but also tackle specific social challenges.

For governments and corporations, impact investment might be a way to tackle the problems without throwing out the whole system.

Critics claim that impact investment can’t really be the answer to the world’s problems because it is born of the capitalist world which caused many of the problems in the first place.

Anti-capitalists would claim that rather than hope for extra crumbs from the corporate table, the real aim should be to turn the table over so that everyone can eat.

The risk structure is also more complicated with social impact investments.

Rather than just considering the usual risk and reward ratio, investors also have to think about impact and, unlike cold hard cash, this is notoriously difficult to measure. Investors need to clarify, at least to themselves, what sort of social impact they are looking for.

The wide variety among social impact investors can make finding funds more difficult. It is also worth remembering that for investors, it certainly isn’t ‘one size fits all’. Some investors are willing to reduce their returns if the social impact of their investment is high but others are not.

Leadership

Across the world, governments have been trying to encourage more investors to think about impact investing and slowly but surely the message seems to be sinking in. Despite this growth, the global impact investment sector is valued at less than $40 billion, according to the World Economic Forum. This is a drop in the financial investment ocean which sees tens of trillions of dollars moving around the world every year.

However, the amount of money invested by the 125 leading impact investors is forecast to grow by nearly 20 per cent this year, according to the latest study by the Global Impact Investment Network and J.P. Morgan.

Governments are not the only fans of these types of investments.

Pope Francis said: “It is urgent that governments throughout the world commit themselves to developing an international framework capable of promoting a market of high impact investments and thus to combating an economy which excludes and discards”.

A number of initiatives have been launched recently to bring impact investing into the mainstream.

One of the most significant came last year when Prime Minister David Cameron took advantage of the UK’s presidency of the G8 to place social impact investment high on the global agenda.

Speaking at the World Economic Forum in Davos, Switzerland in 2013, Cameron said: “I want to use our G8 presidency to push this agenda forward. We will work with other G8 nations to grow the social investment market and increase investment, allowing the best social innovations to spread and help tackle our shared social and economic challenges”.

Cameron launched the Social Impact Taskforce, led by Sir Ronald Cohen. The aim of the taskforce was to stimulate social investment by bringing together government officials and senior figures from the worlds of business, finance and philanthropy.

In September, the taskforce published its report Impact Investment: The Invisible Heart of Markets.

It suggested that as much $1 trillion of capital could be unlocked across the eight participating nations.

“The world is on the brink of a revolution in how we solve society’s toughest problems,” the report claimed. “The force capable of driving this revolution is ‘social impact investing’, which harnesses entrepreneurship, innovation and capital to power social improvement.”

“Given that $45 trillion are in mainstream investment funds that have publicly committed to incorporate environmental, social and governance factors into their investment decisions, it would only need a small fraction of this money to start moving into impact investment for it to expand rapidly along the growth path to the mainstream previously taken by venture capital and private equity.”

Hundreds of global experts contributed over a 15 month process and the report put forward a number of detailed recommendations for boosting impact investment.

Commenting on the recommendations Paula Goldman, senior director at the Omidyar Network, a US foundation specialising in ‘positive returns’ said: “Luckily, many of the policy changes recommended require little in the way of new spending or new legislation. Some small tweaks to modernise regulation could make a world of difference”.

New approaches

The report claimed that a growing number of ‘impact entrepreneurs’ were using their creative energy to find new sustainable ways of addressing social problems.

ClearlySo, which helps social entrepreneurs raise capital, recently secured £804,000 in a deal led by Big Society Capital (an existing investor) and a number of private investors including The Body Shop co-founder Gordon Roddick.

The deal marks BSC’s first ever follow-on investment on top of the £1 million it committed to ClearlySo in July 2012 and shows that ongoing relationships in the social investment market are possible.

ClearlySo has directly raised £16.4 million of impact investment for over 40 clients; such as a £1.25 million deal from Big Issue Invest and Bridges Ventures for social enterprise London Early Years Foundation.

ClearlySo CEO Rodney Schwartz said there was a clear difference in attitude between this investment round and previous efforts, reflecting a change in how the social impact investment sector is seen in general.

“Previously, the investment could have been seen as ‘soft money’ – and many of our investors were friends and family taking, at best, a long-term view. This time around, our shares were oversubscribed, and we could have raised even more. Commercially-minded angels now see ClearlySo as an attractive investment which is also supporting and enabling dozens of socially impactful firms to raise capital and generate enormous social impact.”

Writing in the Guardian, Social Investment Business chief executive Jonathan Jenkins said organisations looking to access impact investment funds should do their research.

“Read up about social investment and what’s in it for you,” he wrote. “I would recommend Social Investment Explained by Social Enterprise UK, supported by the Big Lottery. Social investment is not a replacement for grant funding, by the way.”

“You’ll note that I am not recommending tapping up the mainstream independent financial advice (IFA) community – yet,” Jenkins wrote.

“I would love to be proved wrong, but on the whole I think the IFA community is still in the early stages of education in this area. This is bound to change though as the new social investment tax relief gets off the ground and IFAs start to realise its potential.”

Maurice McLeod is a freelance journalist



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