Impacting investing: trends, issues and capabilities
You have to feel a bit sorry for the G8 group of leading industrial countries. Not so long ago their annual get-togethers, hosted in rotation by one of the member states, used to be the most important meeting on the global economic calendar.
Back in 2005, when Tony Blair hosted the leaders of the US, Japan, Germany, France, Italy, Canada and Russia at Gleneagles in Scotland, they all got their chequebooks out and pledged billions of dollars of extra aid to Africa. How the world has changed in eight years. Since the global financial crisis of 2008 the centre of economic decision-making has shifted decisively away from the old powers of the G8 to the wider G20 grouping that includes China, India and other rising powers. Worse, the G8 countries are all in the fiscal mire, so no chequebooks will be waved on 17-18 June at Lough Erne in Northern Ireland when the UK plays host again. Prime Minister David Cameron, however, is still hopeful (well, he has to be, doesn’t he?) that under his chairmanship the G8 can agree on some new ideas to revive the global economy. And what better than a new idea where Britain leads the world: social investment.
Opinion is still divided on whether social investment, also known as impact investment, is the great hope or the great hype. The idea is an appealing one in these financially straitened times: rather than spending scarce government cash or the limited pool of charity money on solving social problems, make your money go further by investing in solutions to social problems that generate financial as well as social returns. It is an idea that has been steadily catching on. Microcredit, for example, has spread widely as a tool to help the poorest of the poor in developing countries (though not without problems or controversies as Kurt Hoffman discusses on page 19). The hope is that social investment can grow similar market-based solutions in education, healthcare, water supply and so on. In developed countries, much of the buzz is about the potential of social enterprises, such as the Big Issue and microcredit provider Fair Finance (see page 9), as a tool of social and economic regeneration. Indeed, earlier this year the European Parliament approved legislation to support social investment, by allowing fund managers to operate across the EU without seeking regulatory approval in each member state.
“Most of the developed economies face a similar challenge – finding better solutions to stubborn social problems when there are few public resources around”, explains Nick Hurd, the Minister for Civil Society who is tasked with nurturing the new market for social investment. His hope is that this will provide a new, additional form of funding for the nonprofit sector. “Social investment is the third pillar of funding for the sector”, he explains, “alongside philanthropy and government financing.”
Hurd also wants to put the ‘made in Britain’ tag on social investment. “The Prime Minister”, he says “is quite proud that Britain is clearly recognised as the world leader in driving the growth of this market”. Big Society Capital, for example, which was launched last year with £600 million capital from unclaimed bank deposits, is probably the world’s largest publicly-backed social investment fund. Other countries are also fascinated by the potential of the Social Impact Bond (SIB) tool that the UK has pioneered, first to tackle recidivism and which is now being applied to other domestic social problems and, maybe, to fighting poverty overseas (although not everyone is convinced, see Caroline Fiennes’ commentary on SIBs on page 5).
So what can the G8 summit do for social and impact investment? Sir Ronald Cohen, who has led the social investment movement in the UK for more than a decade, first as chair of the Social Investment Task Force created by then Chancellor of the Exchequer Gordon Brown and now as chair of Big Society Capital, is putting together the agenda for the meeting. Do not expect big announcements, he cautions, this is about modest progress to build interest in this new market. “Given the disparate understanding of impact investment across the G8”, he explains, “if we could emerge with a degree of understanding of the field and what government policy could achieve, that would be an objective met.” To that end, Sir Ronald is convening 150 leaders in social finance from across the G8 countries in a ‘fringe’ event to showcase best practice and share ideas. His dream is that social investment will provide the impetus so that “social technologies could spread around the world like information technology and biotech have already.” The Lough Erne Summit is just a step on that journey but, he believes, an important one to put social investment on the global map.
For both Hurd and Cohen the G8 governments’ focus on social investment is important for visibility but the real action will have to come from private actors, particularly from the philanthropic sector. “The tools of philanthropy need updating”, says Cohen. He believes that the philanthropic sector will have to take more of the strain in solving social problems (“governments are out of cash and out of breath”) and can only rise to the challenge by embracing social investment. “Radical change”, he says, “needs a new form of financing.”
Philanthropic foundations are top of Cohen’s hit list for those who could and should be doing more to drive the social investment market. “Adopt social investment, make allocations from your balance sheets”, he urges. As Cohen points out, if just 5% of foundation endowment assets were dedicated to social investment that would match the amount given in grants each year. Such dreams have been dreamt before but foundation capital has not, so far, followed the dream. What prospect is there that social investment will become a mainstream activity for foundations? Cohen’s hope is that the visibility and credibility afforded by the G8 will be a nudge.
Another optimistic sign is that foundations do seem to be starting to think about their endowments not just as a cash generator but as a tool of influence. “Historically, most foundations have ignored the opportunities for influence and impact afforded by their shareholder rights” explains Catherine Howarth, CEO of Share Action, a charity promoting shareholder activism to force big business to live up to their environmental responsibilities and social obligations. “But this is changing with a growing number [of foundations] now seeking to intelligently connect the objectives of their giving programmes with targeted dialogue with companies in their portfolios.” If, as Howarth suggests, foundations are seeing investments as an integral part of a joined-up strategy for doing good, then the social investment market will surely benefit too.
An even bigger prize than the billions sitting in foundation endowments is the trillions sloshing around the for-profit capital markets. A tiny fraction of this money steered towards social investment would be a huge boost to the market. Social investment innovator Karl Richter, who will be part of the G8 fringe events, is optimistic that mainstream finance will soon be paying heed. “We need to prove that there is a link between investment strategies that seek social impact and more resilient long-term economic value”, he says. To that end, Richter is working on a new data platform, EngagedX, to track the financial returns of social investment funds as a first step in tempting the big beasts of the City to treat social investment as a serious business that it is worth investing in.
Nick Hurd shares this optimism that social investment will become a mainstream financial service, not just for sophisticated City types but for ordinary consumers too. “In a few years I will be offered this, as a retail investor”, he predicts. In the meantime, eyes will be on the G8 summit and, most importantly, the leaders’ report at the end of the meeting. Just a few sentences about social investment in that report, known in the trade as ‘the communiqué’, could be the signal needed for this market to take off.