BRUTUS: The G8 Impact Report – The Good, the Bad and the Ugly
Some know him as Arthur Wood. We like to call him the sheriff of impact investing. In his latest Brutus column, Arthur shoots some holes in the G8 Impact report, warning that the social sector could be reduced to the role of sub contractor with no guaranteed income, greater risk, and bending to structures that do not hardwire social mission.
So the Scottish Independence vote and the G8 Report on Impact Investing all in the same month – what have they got to do with Spaghetti Westerns I hear you ask? To be trite perhaps the famous long Mexican stand-off at the end of the movie between the three – The Good, the Bad and the Ugly – reminds you of the speed at which this sector moves and the relationship between the Corporate sector, Civil Society and the Government.
You may recall Sergio Leone’s movie was part of a trilogy: the first two, For a Few Follars More and A Fistful of Dollars. And it is to here we will look first…
It was noticeable in the Scottish referendum debate that the NHS was injected as an issue, creating a heady mix of nationalism and social issues and a spin that nearly tipped the balance to yes. I have no desire to enter that debate – other than to highlight an article from the US magazine Business Insider comparing healthcare systems in the US vs other OECD countries, noting that “Nearly all these advanced countries, which provide better health care outcomes at a lower per capita cost, have a system of universal health care in place.”
What I will highlight, however, is the £23bn of savings that the UK government needs to make. This is “the fistful of dollars” around which the next election will be fought.
UK interest rates are at an all time low for 160 years. Despite this, the interest alone on the UK national debt is about half what it costs to run the NHS. Looking to the future, these figures also ignore unfunded pension liabilities (as the Office for National Statistics noted in 2012) of about £4.8 trillion. In addition unfunded health liabilities, given an ageing population, are perhaps five to ten times that amount.
So if you’re not already seeking the comfort of the whisky bottle, together these unfunded liabilities are potentially about ten to thirty times current UK national output (a prediction also based on an EU calculation on long-term productivity that, shall we say, looks “optimistic”). I guess we can take some comfort in the fact that we are not Japanese, Italian or German where by 2050 you will have six to seven folk retired for every ten in work – up from about three today.
Against this backdrop, the recent publication of the G8 Impact Investing Report is fundamental. It indicates that Impact Investing is not nice to have but absolutely critical to engage the capital markets in the provision of social goods for a “fistful of dollars”.
But critically it is important to note this is not new as eager consultants would have you believe but is a redefinition of an existing social contract between the corporate and banking sector, the ‘citizens sector’ and government. It always amuses me when people say impact investing is about engaging the banks in this market and would it not be good to engage the banks – the fact is, they already are.
Looked at holistically, the historic structure of the foundation (from 1922, when it was crystallised in US tax law) created a framework within which the banks take in management fees one to two percent of the core assets of foundations. Those core assets are estimated to be about $1 trillion globally, and are traditionally kept separate from funds that foundations use for a social purpose. On average around 5% of foundation assets are allocated as grants to social purpose organisations. So that means that under the current framework, the 1-2% that banks take in management fees eats 20-40% of the money that foundations allocate in grants. Or when you factor in “frictional” costs about the same as ends up on the front line of social sector organisations – ergo 1-2% of the $1 trillion.
My old bank even called those servicing the sector the ‘Charity Unit’. Indeed the banks in the current framework are the only folks who have an annuity model – for the social sector the current model is a self imposed capital famine with, one could argue, incentives misaligned and, as one former Head of the IRS Exempt Unit (The US philanthropic regulator) noted, “where the serfs come to get the crumbs from the King’s table”.
Indeed, looked at from a banking perspective, impact investing is today simply the injection of a range of new (already existing in many cases) capital market tools and solutions modernising the sector to the benefit of all parties – and at a higher margin potentially for the banks. The fundamental question is not whether it is ‘for profit’ or ‘not for profit’ (all the major current players in UK Impact Investing are legally for profit entities) but what is the exact intermediary framework and what are the legal and preferably regulatory safeguards for the sector and the social mission?
In all this there is a danger that the social sector is reduced to the role of sub contractor with the margin of efficiency, collaboration and scale as well as the future cash flow created by social innovation going to the banking sector. How big could this be?
Well, where we have historically created these multi-stakeholder structures (albeit as public private partnerships) driving efficiency, scale and collaboration that return has been high, in the GAVI framework, for example, driving unit cost of vaccinations from $50 down to a reported $5.
But when I read the G8 report I find myself asking why elements of long-standing, existing legislation that could be adapted were ignored? Why is there a focus on a couple of financial models to the exclusion of others? Ones that hardwire the social mission? Why do the proponents of the report argue for financial multi-stakeholder outcome models and yet seek and suggest a legal and metric framework that is bilateral and un- transparent? Where are conflicts of interest considered?
Why is it that in one of the sub reports of the G8 ironically titles Mission Alignment argues that neither a social mission lock, or profit lock nor an asset lock would be required – or perhaps I have misunderstood? If I have not, in Policy terms you have an endorsement of a process which would see a grant you give away to a not for profit less regulated than for profit impacting investing - and a scenario for a rush to the bottom of deregulation – sound familiar?
Unless we get this right, at best there is a danger of a political backlash which potentially puts the sector back years. At worst we end up with a citizens sector which does not have annuity income, takes on greater risk, and bends to structures that do not hardwire social mission. There’ll be a margin that goes to bankers’ bonuses and not to the social issues which we ALL need funding. Could this really happen? A glimpse of 1930s foundation history will tell you it could, or more recently the Banco Compartmentos case.
Now, none of this is to argue that we do not need the capital markets engaged and that this should not be a very profitable business for the banks. But what we must avoid is a social sector that remains undercapitalised, lacking in scale and – serving as the R&D of society – left out of the success it has created. If this is done creatively there is no reason that impact investing should not become a source of national competitiveness as the substantive capital of the sector (including the $2.3 trillion of local capital now in local markets in the Developing world slated to rise to $17.3 trillion by 2050). And no reason we shouldn’t expect the innovation of civil society to align with the economic development of the bottom of the pyramid – indeed we at Total Impact recently published a report with Accenture titled Education, a strategic imperative for business. You see similar moves by a range of leading corporates from Danone, Unilever, Phillips, Coke to M&S.
The fact is that the current social capital finance model today is Ugly. We should seek not the Bad but the Good – this is the thorn we must grasp if we fail to do so. As ever, “The fault dear Brutus lies not amongst the stars but amongst ourselves.”