Social investing – the emperor’s new clothes?
Key questions need to be asked about motivation, advice and returns behind the mechanisms of social finance and investing.
Nick Hurd MP says we shouldn’t be afraid to do things differently, but Gina Miller believes we should also not be afraid to question when there is little transparency.
First of all, I commend anyone engaging or seeking to achieve a better society for all. That said, I have a number questions about social finance and social investing. I dislike waste, inefficiency, lack of transparency and situations when people and businesses pretend to be something they are not. I can only speak from my own experience, observations and anecdotal evidence having met followers of this new social sector; but each encounter raises more questions than answers.
There is much debate taking place around philanthropy, charity and giving; especially around social finance but what makes me uncomfortable is the notion of making returns from society’s ills. I object in principle to the idea that helping the poor and less fortunate is a dividend-based activity.
There is a return for social investment but I do not think it should be financial.
Supporters of these new innovations talk about recycling and leveraging your money so that it can go even further – which sounds excellent in theory. But my research shows that behind most of the social investment products that have come across our desks are money men, City fees and little clarity of impact measurements that would trigger returns. Impact for most of the products would be a difficult thing to measure.
The mere fact that social bonds and contracts are complicated means they require consultants, experts and money men – and they’re expensive. Why do we need these additional infrastructure costs when doing good? According to Nick Hurd, minister for civil society, we shouldn’t be afraid to do things differently, but I think we should also not be afraid to question when there is little transparency and when there are already practical solutions.
The government has committed £40m to a pilot scheme involving problem families in four local authorities – but how will they measure success? How will it compare to supporting existing government and community charities already doing this work? Apparently the bonds for this project are so complex that a consultancy firm was hired called A4e Insight – costly?
It will take time to iron out issues such as liquidity, caps on returns, no track record, measurement metrics. Once bought, you could be stuck with the bond for years. To attract pension funds and institutional investors as the government wishes, these products will probably need to be worth £100m at least before they invest. Also they would want some control over how the projects are run. So what’s to stop the charities involved just leaving?
Should there not be more pressure on corporate benevolence? There are lots of examples of businesses doing well and donating a percentage of profit for social good: The Body Shop, The Ethical Property Company, Standard Chartered, Deutsche Bank, Mirabaud. But there are many bad examples. How many companies in the FTSE 100 are making profits from UK consumers but giving very little back in terms of tax, corporate responsibility programmes or charitable giving?
I like keeping things simple and understandable. I consider my family to be social investors and benevolent capitalists. We run an efficient, effective business where we treat our clients and staff with honesty and respect; and the more successful we become, the more profit for purpose to would give back to the society affording our success.
I am a great admirer of Warren Buffet, who says he sticks to doing what he does best – investing and making money, and giving away a substantial sum to those who know how, where and when to spend it on social good in a responsible manner. I would suggest this is a good model of social finance as it does not require ever more layers of cost and infrastructure, and supports those community charities that are already long established in their area of expertise. The three legged stool should be:
1) Do business well.
2) Treat your customers with respect.
3) Donate in a strategic, responsible manner rather than so much corporate giving which comes out of the marketing budget and simply means buying tables at charity dinners or the good old golf days.
There are many different views and arguments but I would like to stick to just three. At this time of crisis, both economically and socially, I believe social investing and social finance should take a step back and allow those who have the answers to deliver. Of course the third sector has issues but with smart, strategic giving we can achieve change without more infrastructure costs and reinvent the wheel.
• Infrastructure costs in the social investing sector. In 2010, social investing raised £190m, compared with £3.6bn philanthropic grant funding. The amount the government spent on research and putting structures in place over the last few years was £350m.
• Lack of transparency: searching Google, I could find no costs or fee structure information. I continuously came across the phrase "returns as close/to match market returns"… what does that mean? What happens when markets are down? When we have requested literature, we have been sent creative glossy brochures filled with jargon and sound bites but no idea of costs, fees or terms of return.
• What I can tell you is our own experience of being carbon foundation raising money for a carbon fund.
When we drilled down and they stopped avoiding the question; it turned out they were charging 2-and-20 hedge fund fees. Another very well-known brand in the third sector came to our office asking if we would manage the social bond they were proposing. We refused as we were appalled by the fees they were going to charge and the amount they would be taking for their so-called "administration costs".
When we asked if potential investors would not question these elements, the reply was "they’ve written off that money anyway".
My concerns are about the unsuspecting investors and philanthropists who want to make a real difference but who are basically being ripped off by advisers". There appears to be lots of signs going up above doors saying social investing or social finance, but in the back room it is pure business with those involved earning fat fees.
I believe that ripping off investors with hidden fees is abhorrent; to rip off social investors is criminal.