09 January 2015

An investable society

The world is on the brink of a revolution in how we solve society's toughest problems. The force capable of driving this revolution is “social impact investing” which harnesses entrepreneurship, innovation and capital to power social improvement” – says the first paragraph of the report “Impact investment: The Invisible Heart of Markets” of the Social Impact Investment Taskforce established during the UK's presidency of the G8 and published on 15 September 2014. Let us have a closer look at the impact investing ecosystem on a global level (more about the report >).

Despite the undeniable impact that business has on society, for many years the question of whether its influence is positive or negative has been ignored. However, this is changing.

Risk, return, impact

“In the nineteenth century people talked about financial return. In the twentieth century they talked about risk and return, in the twenty first century we are now talking about risk, return and impact. And when you begin to bring impact into the picture you bring motivations that are beyond profits.” That is the view of Ronald Cohen delivered at the The Future of Impact Investing: A Conversation with Sir Ronald Cohen and top leaders in the field, which took place on 3 November 2014 at Harvard Business School. Sir Ronald Cohen is Chair of the Social Impact Investment Taskforce, co-founder of Apax Partners (an independent global partnership focused on long-term investment in growth companies), Chairman of The Portland Trust (A British non-profit ‘action tank’ whose mission is to promote peace and stability between Israelis and Palestinians through economic development ) and Bridges Ventures (a specialist fund manager dedicated to sustainable and impact investment).

Cohen also co-founded Social Finance Ltd in 2007 and Social Finance US in 2011 which he directed until the establishment of Big Society Capital in April 2012. Social Finance UK is an organisation with the aim of developing a social investment market in the UK. The organisation provides access to capital and advice to investors and social sector entities interested in delivering social impact. It is also a creator of the Social Impact Bond (SIB).

Big Society Capital is the world's first social investment bank. BSC formally launched in April 2012, using an estimated £400 million in unclaimed assets left dormant in bank accounts for over 15 years and £200 million from the UK’s largest high street banks. Sir Ronald Cohen is a Chair of Big Society Capital.

Patient capitalism

In the USA in the late 1970s pioneers such as Green Century Funds, Boston Common Management and Calvert Investments provided the first social impact investments.

“Sometimes 7% return is better than the 8 % return, when you put in extra analysis and other factors. (…) If we put just a few percent of our pension assets into ecological balance, social justice, opportunities, and education, all at once it will ultimately make more money than the 98 % of our portfolio invested in traditional ways, (even if initially returns are lower,) because we are creating the investable society” explains Wayne Silby.

Another pioneer, Jacquline Novogratz in her speech on TED Global in June 2007 named this kind of strategy as “patient capitalism”. In 2001 she founded Acumen Fund, a nonprofit that takes a businesslike approach to improving the lives of the poor. We raise charitable funds from individuals, foundations and corporations, and then we turn around and we invest equity and loans in both for-profit and nonprofit entities that deliver affordable health, housing, energy, and clean water to low income people in South Asia and Africa, explains Novogratz. In her words patient capital is money that can be raised early on and although it gets below market returns it can go the long haul and be combined with the management assistance, and strategic assistance which for some companies are crucial to let the business lift off.

According to the Ceres report a trillion dollars should be invested every year from now on until 2050 in order to slow climate change. At the UN during Climate Week, in September 2014, more than 70 foundations, in collaboration with universities (including The Rockefeller Brothers Fund, Educational Foundation of America, the John Merck Fund, the Russel Family Fund and Stanford University) and faith based groups, schools, hospitals, individuals, and cities, created a coalition called Divest – Invest Philantrophy, representing an investment of $50 billion. They will withdraw their investment in fossil fuels and invest in new energy solutions across asset classes such as renewable coal, energy efficiency, water purification, and agriculture. For example the Russell Family Foundation has invested in Ecotrust Forest Management using funds originally divested from coal holdings in their endowment’s portfolio.

Philatrophic revolution

Impact investments are investments in companies, organizations, and funds made with the intention to generate social and environmental impact alongside financial return. This definition serves as a guide for various investment strategies. It also involves a new strategy for philantrophy. Instead of making donations and grants, in some cases the philantrophic organisations might invest the money, measure the effectivenes of their investees attempts and get some additional financial return. Impact investment is also important because the so called “social sector” across the world is huge. In the UK it has 800 000 people working in it, and across Europe there are 11 milion people working in non profit organizations.

“As I analysed how our system works I realised that the only part of the system that was there to help those who were left behind was the philantrophic sector. It used to be called the third sector and we hated that name and I banished it; and here you hear about the social sector not the third sector... how can anybody be proud of being third right? (…) and the social sector had one characteristic everywere in the world of having no money and no scale. So if you look at how many businesses in the United States over the last 30 years made it through the 50 million dollars of sales the answer is 50 thousand. How many non profits made it through 50 million dollars of revenues? Anybody know? One hundred and forty four. Why was that? (…) we realised that the reason was that nobody was measuring anything. You couldn't tell who was doing a good job at delivering a social return” Cohen explains. “When you begin to measure social return or social improvement and you connect it to a financial return you can allocate capital to those who can deliver the highest social return and those who have the ability to scale up can raise the capital they need in the same way business entrepreneurs can.”

The largest international social value network, Social Value International represents those working to understand, account for, measure, analyse, and manage the wider value created and destroyed by organisational activity. “We have created a clear set of principles which will lead to the inclusion of social, environmental and economic value in decision making across different organisations and sectors, and we develop guidance and tools to put these into practice” says Jeremy Nicholls, CEO of Social Value International.

Apart from how to measure the eventual efficiency, an important question for impact investors is how to choose the best initiatives to invest in. During the G2G Impact Summit “Insights on Impact Investing & Social Entrepreneurship” that was organized by Atlantic Trust in December 2014, one of the panelists was asked how their company seek out and evaluate the firms in which they invest. –“All the groups of investors organise pitch events and networking events where entrepreneurs have the opportunity to present their work. And in terms of the actual investment process it often comes down to spending a lot of time with the entrepreneurs and seeing what is really motivating them. Is this person's heart really in it? Are they doing this because they are trying to have a social impact but in reality it’s about the financial return? And then working with them to meet their goals. (…) Ensuring that patient capital can last long enough to guarantee the mission of those companies” Jenna Nicolas, CEO at Phoenix Global Impact, social impact consulting firm from Washington DC answered.

Demand for impact

The impact investing market also has its demand, supply and intermediaries sides. According to the Social Impact Investement Taskforce Report, on the demand side there are goverments, consumers, corporations and foundations as well as all types of organizations which have a long term social mission. On the same side are impact-driven organizations like social enterprises and any kind of “profit with purpose” businesses and grant reliant organizations (e.g. charities). All of them seek for capital to finance innovative and impacting solutions and ideas.

In the last years we observe a number of governmental initiatives that aim to let the impact investing sector both function and grow. Just to mention a few after the report of GIIN and JP Morgan “Spotlight on the Market. The Impact Investor Survey” :
- In the UK a 30% tax relief for social investments was announced on 19 March 2014.
- In the UK Prime Minister David Cameron launched the Social Stock Exchange in June, 2014.
- In the USA, in 2013 the Obama Administration launched the National Impact Initiative (NII).
- The USA created a USD 300 million Pay for Success (PFS) Fund within the Treasury and a USD 195 million allocation for the Department of Labor.
- In April 2013, the European Union adopted a regulation that defines a new “European Social Entrepreneurship Fund”.
- The Social Impact Investment Forum established by the G8 launched a Global Learning Exchange and a Social Impact Investment Taskforce.

Some interesting pro impact investment initiatives also exist in Australia, Japan, Italy, Germany, and France.

Authors of the GIN and JP Morgan survey talked with a number of investors about the government interventions that would most help them to make impact investments. 65% of 117 questioned investors found the prospect of credit enhancement, e.g. guarantees, very helpful. 65% of more or less the same number of investors would be content with tax credits or subsidies.

Breakthrough: Social Impact Bonds

According to the statistics more than 2/3 of young prisoners go back to prison within 18 months of being released at the age of 21. In order to reduce the figure by 7.5% or more over the whole project, relative to a control group Social Finance created the world´s first Social Impact Bond in September 2010. 17 foundations and charitable trusts committed £5 million to the project. Peterborough Social Impact Bond was designed as a seven year pilot, to test the premise that that offering comprehensive and individual support to 3,000 short term male prisoners would help them stay out of prison and build a new life for themselves on the outside. To achieve this goal Social Finance UK set up One Service to provide housing, family, health, employment and training support delivered by St Giles Trust, Sova, Ormiston Families, YMCA and MIND. The greater the reduction in reconviction rate the higher the return to investors, capped at a maximum return of 13% per year. If the relative reduction is less than 7.5%, then investors do not get their money back and have in effect made a philanthropic donation. So far, investors can look forward to getting their money back with a positive return.

Today there are 26 Social Impact Bonds across the world. The last one was recently launched in Chicago by the city mayor for young children of ages 4 and upwards with difficult backgrounds who have high dropout rates. There are dozens of social issues that are being tackled through the social impact bonds., such as adoption, foster parentage, children from difficult families and many others.

The Social Impact Bond is an agreement between the government or foundation, or cooperation with an organization which covers Social Finance in which the organization acts in a way similar to a venture capitalist that identifies charitable and for profits sector service providers, monitors them and measures the number of beneficiaries whose lives have improved.
“Impact investors have the opportunity to share 46 trilion dollars under the UN Principles of Responsible Investment” encourages Sir Ronald Cohen. “Where to invest? You can invest in impact driven organizations. You can access these organizations through funds or through instruments such as a Social Impact Bond. I've invested in two Social Impact Bonds. You can hope to make 6 or 7 % on your money, in a cause that you believe in. If you failed it was a philanthrophic donation, if you succeed you get your money plus 7 percent a year and you can reinvest it.”

Impact investing is a new invention and will probably grow, evolve and change within the next years. To built a new market from scratch will take at least 20 - 30 years of development. However nothing is certain with regard to future development, and some people claim that impact investing will not grow.

So far, according to the three co-authors of "The Impact Investor: Lessons in Leadership and Strategy for Collaborative Capitalism" there are over 300 impact investment funds working all over the world. On the top of that networks such as The Global Impact Investment Initiative (GIIN), The Intellecap Impact Investment Network, or for instance Omidyar Network.

There are a countless number of entities of different types supporting the growth and development of the concept. Almost every week there is a conference or some sort of debate on the topic and such discussions are staged at locations throughout the world. Looking at the high levels of effort and passion from the social entrepreneurs point of view, and at the positive social results of many of the enterprises, it can only be hoped that impact investors succeed.

Paulina Wajszczak for