There is a curious aporia at the heart of the work of the independent advisory group on ‘growing a culture of social impact investment’, which published its recommendations last week. It considers the motivations, knowledge and behaviours of individual investors and savers. It pays considerable attention to the feelings and actions of every actor in the financial services industry, from independent financial advisors to regulators, via every possible kind of fund manager. The organisations delivering the impact however, barely get a mention. They are the children to be seen and not heard at the investment high table, ignored except when chastised for failing to be sufficiently ‘investment ready’, or for being refractory in their demonstration of persuasive outcome measures.
This fundamental lack of consideration for the productive element of this system has led to a set of recommendations that fails to take into account the key features of the economy that investors and funds are aiming to support. It’s hard to see how the various elements that do feature in the final deck will get very far without the investment industry stopping a moment and looking at little more closely at where they want to place their money, and how acceptable that money will be to the organisations doing the work of delivering social benefit.
The report includes a set of ‘practical’ recommendations, in and amongst the proclamations about the UK’s role in pioneering the social impact investing market. These aim to:
- increase the choice of savings, investment and pension products that offer social impact
- broaden sources of funding for enterprises targeting social impact as well as financial return
Well and good, but let’s stop to consider some of the issues identified, including ‘deal flow and the ability to invest at scale’. The supply of capital to community owned and socially responsible businesses will only be improved if there is demand for that capital.
There’s a straightforward problem here that is masked by the positive rhetoric of choice for investors. Putting it bluntly, identifying new business opportunities with the potential for growth and good returns for investors, but that also generate significant value for all stakeholders, is extremely difficult. The report seems to overlook, completely, that the key to unlocking people’s engagement with businesses that generate social impact, is their understanding that those businesses have an equal concern for all stakeholders – not just the investors. And when looking at ‘a lack of investable assets at scale’, we need to really interrogate the underlying legal forms and business models of the organisations we are talking about here. One of the main reasons why businesses that operate in the social economy can find it difficult to compete with private enterprises is their lack of risk capital. This can be based on the pretty commonly held belief that charities, community businesses and social enterprises should not have shareholders, the investors who provide capital to business.
Equity investment is considered anathema, because shares give legal title, meaning that the enterprise is owned, controlled and run in the interest of investors, not in the interests the enterprise has been set up to serve: their community. As the report goes on to state concerning low take up:
“One reason is the widespread assumption that one can’t support social causes and produce market-rate returns at the same time, something that matters more for some investors than others.”
But it doesn’t address one of the fundamentals here. We are – in virtually all cases that concern charities, social enterprises and community businesses – asking investors to forego capital gain. We want money that is aligned to the social purpose of an organisation. Money that is forgiving if things go wrong. And money that does not expect to extract value from social purpose the business serves, That is, in short, money that is long term and engaged. And this is perhaps why some of the more interesting – and better placed – financial products, which best serve the interest of businesses in the social economy are over-looked entirely in this report.
These are the products geared directly to the needs of the social economy, and not the best interest of commercial financial intermediaries. The key example here is withdrawable share capital through community share issues by community benefit societies and co-operatives.
This type of equity is long-term, aligned with the interests of a community business and non-transferable, so that there is no potential to speculate on a hypothetical futures market. With the safeguard of an asset lock, it will never produce a capital gain. This will be far more challenging to financial advisers than a large charity bond, and will require a significant shift in investment practice. It is this kind of shift, however, that will free up the right kind of capital for the social economy to do what it does best: work to achieve social benefit.
The culture we have to foster is one where people invest in the things that matter to them, but don’t expect unrealistic, speculative returns. This is not an unachievable ambition. Since 2009, almost a 120,000 people have invested over £100m to support 350 community businesses throughout the UK. At a local level, where the investment can be most engaged, we have seen community shares used to save local shops and pubs, finance renewable energy schemes, transform community facilities, support local food growing, fund new football clubs, restore heritage buildings, and above all, build stronger, more vibrant, and independent communities.
Power to Change, working with partners, have invested alongside thousands of everyday, ordinary investors, ensuring community businesses have access to the right sort of capital, allowing the enterprises to ride the ups and downs of development, which are to be expected when pursuing ambitious, challenging or innovative business goals.
Part of getting this right also concerns reliable and accurate reporting. Doing is not enough, we also need to be able to show.
There is much expansive rhetoric in the report about alignment with the sustainable development goals. This sounds suitably impactful, but is the kind of impact reporting that is very far from the day-to-day operations of the vast majority of social programmes and community organisations, which have few resources to meet these kinds of demands.
There are important questions to answer about who is responsible for data collection of what type and at what level of abstraction. Just as social organisations need the right kind of capital to conduct their work effectively to satisfy their stakeholders, so they also need the right kind of data collection to support their work. Reporting must be secondary to that need, and not a primary requirement that supersedes the delivery of the social benefit that prompted an investment in the first place. This makes the recommendation to ‘operationalise the ability to demonstrate impact and monitor and report outcomes’ contained in the report, a problematic one that requires unpicking.
Much of the work of demonstrating impact should lie with intermediate organisations better able to broker access to large scale datasets, and finance their analysis to a sufficiently high standard. This is a much more effective sharing of capacity, and produces learning that can then be shared with end user social organisations to integrate into their work. Impact measurement must not be an extractive industry designed to suit investors. It should be reciprocal, intelligent and geared to the continued improvement of frontline work to deliver social benefit.
If we are to grow a culture of impact investing, we need to keep our eyes firmly on the prize: greater social and environmental benefit, with the right cash doing its bit to make that possible. As set out in this report’s recommendations, there’s a risk that we work the other way about: to encourage social organisations to be responsive to the motivations of capital. To borrow from the Netflix hit Stranger Things, that is the upside down.