Connecting to the social sector: Democratising social finance
With the chaos caused by the 2008 financial crash paired with continuing development in finance technology, more people have been moving away from traditional savings markets to explore how they can become investors. This session explored this shift towards “democratisation” through a range of different social investment platforms and initiatives.
The idea of “democratising investment” means raising money from retail investors, or “ordinary people”. It has emerged in the context of the rapid developments in financial technology, and following the economic crash of 2008 – both of which have pushed people away from the conventional savings market.
The financial collapse led to “disgust with capitalist markets and a search for alternative saving models,” explained Hugh Rolo, director of development at community enterprise network Locality.
The introduction of online investment technology has allowed people to invest their own money more easily, “without needing elaborate stock-brokers that people used to need to buy shares or investments,” Rolo added.
This session looked at the notion of “democratisation” through three different examples: the development of community shares, the launch of ethical investment platform Ethex, and the work of Power to Change, a charitable trust supporting community businesses…
The term ‘community shares’ was coined by the Development Trusts Association (now known as Locality) in its 2008 publication Community Share and Bond Issues, which examined how a growing number of community enterprises were raising investment capital from their local supporters.
In 2012 Locality and Co-operatives UK launched the Community Shares Unit (CSU), which continues as a joint initiative between Locality and Co-operatives UK. Its objective is to grow a sustainable market for community shares in a range of community and co-operative enterprises.
According to the CSU, community shares “can save local shops and pubs, finance renewable energy schemes, transform community facilities, support local food growing, fund new football clubs, restore heritage buildings, and – above all – build stronger, more vibrant, and independent communities.”
It says that since 2009, almost a 120,000 people have invested over £100m through community shares to support 350 community businesses throughout the UK.
Hugh Rolo told the session that community shares were a good example of a “democratised” market. Firstly, because only community benefit societies and cooperatives – “asset locked, one-member-one-vote” organisations – could raise capital through community shares. “So even if you own 99% of the shares, you still only have one vote,” he explained.
Secondly, the data available showed that the people who bought community shares were often ordinary local people buying shares for the first time and “not high net-worth or sophisticated investors”.
Rolo added that because investors also gave up any share of capital gain, community shares were not only democratic, but radical. “These are people who are genuinely motivated to invest for social purpose. And that’s why we call it truly radical capital: it is not at all equivalent to equity or the conventional capitalist market.”
Lisa Ashford, CEO at online positive investment platform Ethex, said the £70m they had raised was also generally from “normal people rather than high net-worth investors”.
Part of the attraction of the platform was that people were able invest smaller amounts of money. Ethex also worked hard to connect investors to the enterprises they were supporting.
Ashford cited the platform’s Energise Africa campaign where they had joined forces with another platform, Lendahand, to provide UK-based retail investors with opportunities to invest in pioneering businesses that install life-changing solar systems in homes in Sub-Saharan Africa - bringing clean energy and economic opportunities to families.
“We’re doing awareness raising and showing how people can get involved in a small way. Energise Africa enables people to get involved more easily and more affordable rate,” Ashford said.
She added that ‘match-funding’ – where institutional partners matched individual investments on a pound-for-pound basis – had also been a strong factor in achieving their targets. In its Energise Africa project again, it had given “more incentive for individuals to invest,” and “more confidence to individual investors”.
However, she said there was more work to be done to democratise Ethex’s investor profile. Though the male/female split was fairly equal, “it’s still white, over fifty… so it’s about how do we target different segments and personas within the market population?”
One answer could be through making information about it more easily accessible. A 2017 study by Triodos Bank proved many retail investors were keen to invest for good, but “they don’t know how to make the first step… they need a lot more information at retail level. How can people access these products in an easy to understand way?”
One answer was “to try and go smaller to go bigger”. She explained: “We need to be able to enable retail investors to invest perhaps smaller amounts – through a lot more education and awareness building in order to create a bigger overall impact, because if you want to create more diversity in the market you’ve got to make it easy for people and perhaps allow smaller amounts to be invested – perhaps through greater technology or more campaigns to raise awareness of how small amounts of money can create big impact when all together.”
Power to Change
Ged Devlin, head of development at Power to Change, said democratising investment required focusing on a different kind of investor.
“Peer-to-peer crowdfunding initiatives aren’t democratising,” he claimed. “It’s still white males in the south-east of England with massive disposable income.”
But through putting the needs of the community first, foundations like Power to Change had attracted a different type of investor. For example, the investor profile for Leeds Community Homes was “young, mostly from Leeds, 60% female and a high percentage sub £35k earners,” he said.
Using data well could also support democratisation. For example, through collecting data about Grimbsy and the community, Power to Change enabled the community centre there to attract a more diverse pool of investors.
Go smaller to go bigger: smaller amounts mean more people can invest.
Make more information more easily available for people.
Use data to work out what people need.
Look after investors pre and post investment.
Use technology to make process easier
Address concerns people have about the issues such as risk – some people remain to be convinced about whether these types of investment are more risky.