Are institutional investors asking for the moon when it comes to social investment?


Caroline Hartnell

Caroline Hartnell

Caroline Hartnell

On 13 July I attended the launch of a new report on social investment. Investor Perspectives on Social Enterprise Financing focuses on what is surely the holy grail of social investment: making it mainstream. It looks at the potential for institutional investors – pension funds, socially responsible investment funds, wealth managers investing funds on behalf of clients, and retail banks – to adopt social investment.

Based on interviews with 55 institutional investors, and written by ClearlySo, commissioned by the Big Lottery Fund, the City Bridge Trust and the City of London Corporation, the report shows that there are few investments available in the UK that suit this market – products that offer near-market returns, are relatively low risk, and demonstrate social impact. This group of investors also needs larger investment opportunities and products with greater liquidity and a proven track record. Hence the low levels of social investment in the UK – just £190 million last year.

However, there are barriers to this sort of investment becoming widely available. These include the need to demonstrate that the risk is low and the need to satisfactorily measure the social impact. It seems that philanthropy could play a role in overcoming both of these. Foundations – or indeed government or institutions like the EU – could lower the risk by providing guarantees or by taking on the tranche of investment with the highest risk. Cornerstone investment from foundations and/or government can then leverage in private and institutional investors, reassuring them with the guarantee that first loss will not fall to commercial investors in what is still an unknown and untested marketplace.

One area of constant debate is how to effectively measure social return on investment – social impact. This is something else that foundations could help with. Where social enterprises have a mix of funding, including grants, the grants could usefully include money for impact measurement and so help build the capacity of social enterprises to measure their social impact. Alternatively, philanthropic money can be used to develop tools for wider use, for example New Philanthropy Capital’s Well-being Measure for measuring the well-being of young people aged 11-16, which is one way of measuring the social impact of interventions with young people.

One question is whether philanthropic money used in this way is a short-term measure, while confidence in the low risk profile of social investments grows and the capacity to measure social impact is developed, or whether this sort of support will be needed in the long term if social investment is to be adopted by institutional investors.

Such questions notwithstanding, by the end of the meeting I was feeling that a profile of the ideal mainstream social investment was emerging, with a clear role for philanthropy to help develop the social investment marketplace.

But others I spoke to after the meeting were more sceptical. The trade-off between risk and financial return is a standard one for investors to make, they pointed out: lower risk and lower return are the hallmarks of a gilt-edged investment. So, in their view, the prospective mainstream social investor is looking for a perfectly standard trade-off between risk and return, with demonstrated social impact, persuasively measured, thrown in.

Is this a realistic demand? Who will pay for the social impact if it is not reflected in a further trade-off in terms of lower financial returns? In the UK, where the restructuring of the state – ie the spinning off of functions traditionally carried out by the state to other sectors – is seen as a great opportunity for social enterprise (I personally have great misgivings about all of this), could the government somehow continue to fund the social impact so as to make these investments more attractive?  While this would seem to be the most effective way of achieving goals around social impact, it might fly in the face of the current economy drive and spending reductions affecting all levels of public spending.

Are institutional investors asking for the moon? Or is the proposed trade-off between risk, financial return and social impact a perfectly reasonable expectation? By the time I went home, I still wasn’t sure.

Tagged in: social impact Social investment

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