Doing things differently
Earlier this month at the World Economic Forum at Davos there was much talk of ‘ethical capitalism’, reflecting the increasingly widespread recognition that capital can be used for social good. Using financial capital to make social impact is Foundation East’s bread and butter of course and here in the UK it is not alone. There’s a burgeoning social finance field with new products, ideas and organisations that are also doing things differently with money.
Rising up the agenda is Social Investing, also known as Impact Investing. This is the process of investing (either debt or equity) in businesses where that investment is seeking both a financial and a social return. An investment could be a loan to a chain of nurseries to support their expanding through a franchise model (increasing the availability of affordable childcare places across a region) or it could be taking a stake in a manufacturer of water sterilisers sold to ‘bottom of the pyramid’ markets in the developing world (saving lives through increasing access to clean water). The crucial thing is that the business has a social impact that will be increased by the investment and that the investment will pay a financial return (albeit potentially sub-commercial) at some stage (it could be a long wait and impact investments are often of ‘patient capital’).
The growth of the social investing field over recent years is the beginnings of a big story. This is genuinely about using money differently. Some of the biggest social investors to date are charitable foundations. Previously charitable foundations with endowments have tended to maximise their income from the endowment, by investing it in traditional markets, and then distribute grants to fulfil the organisation’s mission. It’s taken a surprisingly long time for even a very small proportion of those charitable endowments to be used directly in such a way as to contribute directly to the social mission. Esmee Fairbairn Foundation in the UK, for instance, has used some funds to invest directly into organisations that fulfil the Foundation’s mission. They expect a lower financial return but a higher social return than on a regular investment.
For pioneering mission-focused investment and other innovations the UK social finance sector is considered to be the most innovative and advanced in the world. In 2012 Big Society Capital was launched – effectively the world’s first social investment finance institution – it is backed by £600m of dormant funds in bank accounts and further funds directly from high street banks. Its mission is to innovate new forms of finance and amongst its early investments it’s supported Social Impact Bonds, a new method of encouraging private capital to unlock public good. Last month saw the launch of Ethex, an online platform for trading shares in social ventures, a move that should help to allay investor’s fears around illiquidity of shares in social organisations. Meanwhile, on the demand side, there are intermediaries working to increase the flow of investment-ready organisations. Active in that space are UnLtd and the Young Foundation, for instance, with their Big Venture Challenge and Accelerator programmes, respectively.
Nevertheless there is certainly more noise than action, more talk than deals, and social investment is still very hard to do. Structuring and pricing deals, undertaking due diligence, setting and using social impact metrics are all throwing up new challenges. Using existing resources differently is harder than it looks!
As an organisation Foundation East has always recognised that capital can be used for social good. The business’s track record stands testament to the fact that financial capital, used well, can make positive social impact. Foundation East doesn’t just do things differently with money though. The same underpinning approach and pioneering spirit applies to its work with other kinds of capital and assets. By viewing property assets through a social paradigm Foundation East has helped develop Community Land Trusts, which use physical assets for community benefit. Our own mutual structure allows us to work with our members to create, further and use social capital within our region. As a Director it’s great to work with an organisation that is not just about ethical capitalism, but about an ethical approach to capital and assets across the whole spectrum.