Why we need a fair price for social value

Uli Grabenwarter

Impact investing has come a long way towards being a recognized investment option. Although no uniform impact metrics standard has emerged yet (and possibly never will), there is increasing consensus that pre-defined social impact objectives need to be tied to the financial performance of social enterprises. Payment-by-results instruments, such as social impact bonds, illustrate how social impact performance can be factored into the way returns on the financial instruments that fund social sector organizations are calculated. But if we want social impact to become a part of economic decision making more widely, we need to start offering a fair price for the creation of social value, rather than simply reimbursing its cost.

Until today, the use of social impact indicators has been mainly as an accountability tool for social sector organizations, a way of showing whether intended outcomes have been achieved. From this perspective, social impact metrics appear to serve the purpose of justifying an economic decision to make an investment that may appear counterintuitive if judged on purely ‘economic terms’. The entire debate on the trade-off between social impact and financial return is based on a reasoning that proposes social impact as an ‘excuse’ for ‘below-market’ financial returns.

It is about time that we got to grips with the question of why social sector organizations still have to apologize for delivering ‘below-market’ financial returns. Or, better still, we should be asking why we are not prepared to enable social sector organizations to deliver market returns. The most common reason why social enterprises often can’t deliver market returns has nothing to do with their own performance. It is a logical consequence of the fact that we still refuse to remunerate social enterprises for the value they create. Instead, we stick to the logic that social value comes free, and that social sector organizations should, at best, be compensated for the cost they incur in delivering it.

Isn’t it counterintuitive that we have no difficulty in accepting that all the consumer goods we buy and use on a daily basis trade at a price that is sometimes many times their production cost and yet refuse the same treatment to enterprises whose mission is to create tangible benefits to society?

If we want social impact to become a part of economic decision making we need to recognize social impact at its value and not only at its cost. Until now, when governments outsource social service delivery to social sector organizations, they set the price they are ready to pay exclusively as a function of the savings they can achieve in their state budgets and the cost structure of social sector organizations they outsource to. They disregard entirely the social value such social sector organization may create.

Such an approach deprives social enterprises of any means to reach scale. In the absence of fair remuneration for the value they create, social enterprises will not be able to grow organically nor to attract investment capital at scale to fund their growth.

If governments seek to mobilize private sector funding for social service delivery, they need to leave behind the logic of tax-funded costs of a social welfare state. Instead, they will have to adopt a new role as market participants in a social impact market where they buy social services for a price that expresses the value these services create for society.

We have to acknowledge that the tax-funded model of our welfare state is no longer affordable. It also remains to be seen whether the involvement of the private sector can lead to a more sustainable concept of a welfare state. But looking at the history of financial markets and where they have led us, social sector actors deserve a level playing field in proving that they can produce better results for society than the pre-2008 economic system has delivered.

Uli Grabenwarter is head of strategic development at the European Investment Fund. Email u.grabenwarter@eif.org


Comments (0)

Leave a Reply

Your email address will not be published. Required fields are marked *



 
Next Opinion to read

Time for a total-sector perspective on impact investing

Maximilian Martin