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Debates

The Future of the Euro

How Europe can lead in "social impact investment"

Rupert Evenett / Feb 2012

European Commissioner Michel Barnier at his conference on social entrepreneurship. Photo: European Union, 2012

Psst!  Over here.  Do you want to invest in growth?  In a growth market that’s also an enterprise market?  (And how many of those around are there at the moment?)  You do?  That’s fantastic.  Let me tell you more about it.  It’s called Social Investment (also known as Impact Investing).

Across Europe thousands of social entrepreneurs are combining social values and motivations with business acumen.  They are using enterprise as a sustainable platform for effective social intervention.  They are active often in large and growing areas where private enterprise can lack the appropriate values fit, for example in community health care and social care or in skills and training for the young.  They are innovative and create a public good for the often most vulnerable fellow citizens that they help.  And by avoiding the need for subsequent (bigger, more expensive, less effective...) critical and institutionalised action by the state they save money for the public finances – precisely through improving the life opportunities and capabilities of the citizens concerned at the same time.

A “triple bottom line” in the jargon – and good news for empowering citizens in anyone’s language, especially at a time of economic and social fragility.

Of course social enterprise is partly vintage wine in new bottles.  Cooperative and other enterprising associations have always been with us.  But it’s getting new life from a new generation of social entrepreneurs who are creating a new and exciting prospectus for social investment – and just need access to capital to achieve so much more.

People like Chris Manze of Stone Soup in Nottingham who used an initial £0.5million of scale-up social investment to build what is now a large and broadly spread social enterprise covering social care, training and employment services.  People like Jolanta Lacosta of AmbitiousAboutAutism who used £5million of social loan investment to turn a group of portacabins into an innovative leading school for autistic children and is now innovating again with a model for post-school university level education to create richer opportunities for real progression for them.  People like Rachel Talbot of Cambridge Citizens Advice Bureau who by creating a social enterprise hub of advice through a £1 million social loan has given a blood transfusion to the idea of civic advice, practically helping individual citizens secure their rights.

And what’s really exciting is that this new wave of social enterprise and social investment has passed a threshold.  Not just an idea though still in its infancy, over the past ten years it has become an existing practice with a growing track record.  A growing track record of social enterprises showing they have viable business models and, more importantly, the ability to execute them.  And a growing track record of risk and return working – of social investors investing in these enterprises and finding the risks are manageable and not as great as you might think.  In the UK, social investment loans from different providers yield 5-6% (and payment-for-success innovations like social impact bonds have the potential to pay higher equity-like returns).  In the US, funds like the Calvert Foundation’s Community Investment Notes yield individual investors up to 2%.  The acceptability of such returns suggests that the risks (and blended returns) of social investment are getting better understood and are no bar to investment.

In short, social investment is now an Emerging Market, with the opportunity like many an emerging market before it, actually to emerge and become a significant economic and social force.  And the classification as an emerging market is important because it identifies what needs to be done in a very un-rocket science way.  It just needs to be able to keep going in building a track record of successful investment and acceptable risk.  Like successful emerged markets before, by demonstrating its risk and return characteristics, social investment can start attracting mainstream investment capital and by taking the “exotic” out of the social can establish itself as a viable if still alternative investment class.  Hedge funds followed this route – wouldn’t it be nice to see social investment make better use of the same roadmap?

Still with lots to prove and fragile as well as exciting?  Of course.  What new entrepreneurial market worth its salt isn’t? This is about entrepreneurs creating something new with all that that entails.  And it could be big – in fact needs to be big to address the scale of public need while also diversifying the financing of public good at a time of public financial constraint.

Let’s look at some figures.  Bank J P Morgan in its social finance research has suggested social enterprise and charity already contributes 1.5% or £24billion to the UK GDP alone.  Their December 2011 survey suggested an expected funds flow globally into social investment of US$4billion.  A comparison with private equity and hedge funds suggests a target for social investment of 1-2% of mainstream investors’ portfolios is reasonable (with some aspirationally projecting 5-10% on a ten year view).  This is big stuff.

Yet history of course is full of good ideas that deserved to but didn’t flourish.  What can we all do to help this social investment market build on early success?

The European Commission has already done a lot to catalyse social investment (look at the creation of the European Investment Fund’s social investment facility) and the UK’s creation of Big Society Capital, for example have an important ongoing role.

But much of what is needed immediately is technical.  We need the financial risk and return data across the field of social investment to be collected in aggregate and on a comparable basis – it is this data and not just the individual investment experiences that will finally transform social investment into being an investible alternative asset class.  This needs a trade body or government sponsored body to take the work in this area of innovators like the Global Impact Investing Network and apply it tailored to a more regional and local basis.  We need social investors to experiment with retail investment products for high and medium high net worth individual investors and with stock exchange listed collective investment vehicles for social investment.  And therefore we need the financial regulators across different European markets to acquire the relevant social investment sector expertise (especially if a European passport for social investment comes in) so they are effective regulators but not excessive brakes on this needed experimentation.

We need existing charitable foundations (and crucially their regulators) in different markets to embrace the multiplier benefits of so-called “mission related investing” – incorporating social investment as initially a small percentage of their core investment programmes for their endowments and not just as part of their grant giving – a move which would really catalyse social investment.  And we need banks and other mainstream financial investors to see the long term benefits of dipping a toe into this growth investment market that is so different both from established corporate social responsibility grant-giving and from ethically-screened investing. 

Returns that are a blend of financial and social returns will be attractive to investors on a financial basis alone in our current low interest rate, yield hungry environment and with social returns - or a public good narrative – on top, the appeal to retail investors is very marketable.  Who said good has to be uncommercial?

And this is also an opportunity for Europe to take a leadership role in the new global growth market of “Impact Investing”.  If Europe’s financial markets don’t take a lead in this, others will.  In Brussels, Commissioner Barnier’s recent conference on social enterprise gave important and forward looking leadership. The time is right.  Let’s take our lead from the entrepreneurs themselves and roll our sleeves up to carry on with what is now a practical job of continuing to build this market.

 

 

 



Rupert Evenett

Rupert Evenett

February 2012

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