SE100 Investor Index calls sector to account
The development of a social investment market has tended to follow the experience of mainstream investment – as the ecosystem has developed, demand and supply have been slowly increasing. The main difference is that in mainstream markets the investor and the recipient of the return are the same.
To manage the demand for investment from a large number of investors, new intermediary investors emerged providing a range of packaged investment opportunities. Naturally, investors wanted information on who was providing the best returns – and so ratings were born.
In social investment either there is no expected financial return or, if there is, the people receiving this return are not the same as those receiving the social return. This means there hasn’t been the same demand for ratings of social investments – even though it would be recognised that ratings provide information and encourage competition and performance.
Nonetheless, we need to start providing more information in a consistent way that allows comparison between social investors. As well as acting as a proxy for the demand that would otherwise come from the beneficiaries of social investment activity, this information will also help investees identify investors whose values are aligned with their own business.
It would also help investors see what their peers are doing and consider whether they should change their own approach as a result. Generally, we change more quickly if one of our peers explains why they are doing something than if some other group or organisation tells us we should.
The initial information that we have included in the SE100 Investor Index relates to a small number of social investors and we have focused on transparency – and especially transparency of information around the social return created by social investments. After all this is what makes social investment different from investment, it’s social.
Everyone is welcome
The website is open. Any social or impact investor can add their information and we will be encouraging others to join in, both to add their own information as it stands but also to help improve the existing ratings. Our experience over the last few years of running the SE100 Index was that we had to develop as the standard of social impact reporting by social enterprises increased and we would expect the same to be the case for social investment. We also hope that impact investors will want to join in. At the same time we will be adding information ourselves based on publicly available information and investors have the opportunity to add to what is available on their websites.
As this grows we think that this will become more relevant to impact investors and also to ESG investors (those concerned with environmental, social and governance performance) and mainstream investors who are themselves investing in social investment funds. As pension funds become more involved in this market we would expect the demand for information on social value to increase, not only on an investor’s approach to accounting for social value but also on how much social value is being created.
Any rating system means that there will be some at the top and others at the bottom and, of course, this isn’t always comfortable.
Although this is a developing area and aggregation of impact at a fund level remains a challenge, progress is being made and more demand for this information will encourage innovation and collaboration.
In the short term we would also hope that the index will make it easier for investees to identify the right sources of investment, reducing costs of finding finance and over time increasing the number of successful deals.
Any rating system means that there will be some at the top and others at the bottom and, of course, this isn’t always comfortable. Mainstream financial investors, when acting on behalf of other investors, must report performance as part of their accountability. Ratings and performance influence the flow of finance to those investors generating higher returns. The analogy is that social investors should report performance on social impact as part of their accountability and over time finance should flow to those investors able to create more social value. So those investors, and especially their boards, who welcome an environment where they can show the value they are creating and draw in more finance, shouldn’t be nervous.
This is only a beginning. Our initial approach has been very pragmatic and is based on the availability of information on how investors consider the social return that is being made by their investments and how they report on that return. In the main SE100 Index we ask questions about the approach to managing social value since there are not enough organisations reporting on how much value they create in ways which permit comparison and rating. Equally, we would want future iterations of the social investor rating to move to a better assessment of how social investors address these principles.
More clarity over what the social return is will increase credibility. More credibility will increase the flow of funds to activities that themselves are creating higher social returns.
Photo credit: Nik Voigt, Matter&Co