Why a narrow definition could create a net loss for social investment

Last year I attended a working group meeting for the EngagedX social investment index as we sought to decide what’s in, what’s out, what’s important and what might be nice. I was struck by a conversation about what was considered to be social investment, and particularly what was ‘social enough’ to be included. Given the expertise in the room, I was surprised by the diversity of views.

So, what is social investment? In my various roles – working for a bank, as a grant funder, as a Trustee of a social finance intermediary and as an individual donor – I’m involved with many things that could be considered social investment. But it is never 100% clear to me what is and what is not.

Understanding what we mean by social investment matters because everyone involved – governments, banks, social finance intermediaries, investors, social enterprises and so on – depends on a common definition to develop the capacity and capability. The bulk of any development money will go into the commonly understood definition. Whether that’s the detailed terms of a tax break or the risk assessments of financiers, a different definition could mean a difference of hundreds of millions of pounds going in or staying out.

A quick internet search turns up Big Society Capital’s website, which defines social investment as “the provision of finance to generate social and financial returns”. Done. Sorted. Move on.

Well… no. There’s still an awful lot of room for manoeuvre in there. A more detailed definition regularly discussed is along the lines of “investing money for a social purpose with an expectation that, at minimum, the full principal/capital will be returned”.

Even if this is not an official definition it seems to be where most of the development effort is currently focussed. It’s a model that sits well with Social Impact Bonds and Payment by Results. And it is relatively easily sold to potential investors as there’s an implicit promise that the money will come back (possibly with interest).

Critics point to various potential market failures of this definition. These include delivery organisations cherry picking to get results; failure to recognise the most difficult issues; failure to address issues where the benefits are too long term or widely dispersed. My concern is only that it seems terribly narrow. This definition describes just one small part of a much broader spectrum of activity – much of which is not currently being fully considered or investigated.

So – let’s try relaxing our definition and thinking more broadly.  

First, let’s relax (ok, ignore) the bit about “the full principal/capital will be returned”.

In my roles as a personal donor and a grant funder, I do not expect to get my money back. But I would be delighted if for every £1 I donate, the organisation I supported could spend £1.50. Or even £1.01. The charity and its beneficiaries would no doubt be delighted too. If we could invent a social investment mechanism that returns or recycles even 1p in the £1 (after transaction costs) to increase social impact, it would make the money go further. I can think of one SROI study that found programme returns of over 400%. But those returns were spread across too many groups and the study couldn’t accurately identify who got how much. The result? Not a good candidate for social investment.

But, if each of the identified beneficiaries put back just 1p into the programme for each £1 invested, all of a sudden there’s another 5p or 10p to go into the next project. And we’re talking a total spend of over £10m a year here so that’s a lot of pennies. 

This feels like social investment to me. Yes, the financial returns are ‘minus 95%’ overall (and ‘minus 100%’ to the investor) but we’re still making the money go further and increasing the social return.

Now, let’s ignore the “investing for a social purpose” and instead focus on “generating social return”.

The common view is that investment from a social investment finance intermediary (SIFI) is social investment, whereas investment from a bank is not. The difference is invisible to me. If the money gets where it’s needed and social returns are delivered, it surely makes no sense to exclude large chunks of finance based on their source. [This is particularly true as SIFIs are often part-capitalised by a bank. Or by Big Society Capital, whose money came from the banks.] If the end goal is to deliver a social return then surely it is all social investment.

As we begin 2014, there is a ‘social finance gap’ in the UK of between £300m and £1bn, depending whose report you read. There is also an almost a palpable collective hope that social investment will suddenly and rapidly take off. If we really want to see social investment expand at pace, then now would be a good time to broaden our horizons and look for any mechanism that will increase the investment and, therefore, the impact.

If it helps make the world a better place, I’m happy to call it social investment. 

Thom Kenrick is Head of Sustainability Programmes, RBS & Trustee of RBS Group Microfinance Funds