A defining moment: what is social investment?

Impact investing, social investing, responsible investing – what do each of these terms thrown about so often really mean? The social investment market will grow much more effectively if those working in it can articulate their work with more clarity, writes director of social finance at Allia Phil Caroe.

Have you ever had one of those cross purpose conversations, where you think you're talking about the same thing but it turns out you both meant something different? Sometimes the social investment world feels a bit like that. There’s a variety of terms being used: 'social investment', 'impact investment', and sometimes even 'social impact investment' (not to mention ‘positive’, ‘conscious’, ‘responsible’, etc.). It's generally assumed they're interchangeable, that it's just a matter of cultural preference which one you choose. But the more conversations I have, the more I wonder whether we're actually all talking about the same thing.

This point was picked up by the Alternative Commission on Social Investment (ACSI), who cited an array of different definitions of social investment and proposed some defining principles of their own. Here I respond with my own thoughts and argue not just for a better definition but for a new set of categories.

Why names?

We should perhaps start by stopping and asking why we need names at all. One answer might be because we want to encourage the development of entrepreneurial culture among social ventures and to showcase how finance can support growth. This is certainly a good and important objective, but it doesn’t warrant giving this particular type of finance a name. As the ACSI points out, social ventures have always had loans and mortgages from commercial banks, but that doesn’t make it ‘social investment’ just because the recipient is a social organisation.

The more important reason is that we want to influence the attitudes, and consequently the behaviours, of investors so that consideration of social impact becomes a fundamental aspect of investing. This attitude shift is in itself a good thing. By moving the conversation on from the opportunity for personal gain to the implications for social well-being, we are helping to create a more responsible and relational culture. Furthermore as money begins to move away from socially irresponsible companies – as we are seeing with the fossil fuel divestment campaigns – this motivates companies to recognise the market advantages of a more responsible and positive impact approach. 

More specifically the shift in investor behaviour will benefit the social ventures seeking investment. Increasing the supply of capital opens the way for increased choice, greater ease of raising finance and the possibility of better terms. In addition, clarity on definitions should better enable social ventures to know what to expect of investors. A bank may be expected to act as a commercial investor when it comes to arranging and managing a loan, but something different might be expected from a ‘social’ investor.

So the purpose of names is not simply to describe finance going to the social sector. That’s not to say this isn’t of interest – tracking the use of finance over time is a valuable marker of the trends in social sector attitudes and levels of entrepreneurial activity. But it is nevertheless just finance for the sector. The value of names lies in identifying and encouraging particular trends in investor attitudes. 

Towards a taxonomy of attitudes

One of the reasons for confusion and disagreement in this space is because we are looking at more than one thing. In the animal kingdom, we recognise ‘birds’ or ‘butterflies’ but we also identify individual species according to their properties so that we know exactly what kind of bird or butterfly we’re talking about. I suggest we need to do something similar. 

What we all agree on is that there is a common theme of investing with social impact in mind. We realise that our investment choices have consequences for others as well as financial returns for ourselves. This is our top level category which, for argument’s sake, let’s call “responsible investment”. We define it in order to give it prominence and focus, and at this broad philosophical level we can argue for everyone to become a responsible investor.

Within this broad category we can then separate out the differences by identifying three distinct types of responsible investment according to the relative weighting of financial and social objectives:

  1. Ethical investing: Investing in mainstream companies for commercial returns but avoiding those creating social damage and favouring those with conscious positive impact policies. There is currently a campaign in the US for 100% impact investing – going “all in” by investing only in organisations with social mission at their core. But while well-intentioned, I think this is misguided. We need companies that manufacture toilet rolls and toothpaste. We need them to create jobs and support supply chains for the health of our economy and our social well-being. But we can choose to direct our investments to companies doing this in a socially responsible way.
  2. Impact investing: Investing in organisations that are making society better with the aim of making strong financial returns. This might include investing in for-profit renewable energy or environmental companies. Tesla, for example is often cited as the impact investor’s dream – a financial success story that’s promoting environmental sustainability. In this category impact is essential but so are financial returns. An impact investing fund might be expected to perform at least as well if not better than a mainstream fund. Everyone can be rewarded (with caveats to the furtherance of economic inequality) as long as the social mission is achieved.
  3. Social investing: Investing for the primary purpose of supporting an organisation to make positive social impact. Investors may seek market-comparable terms where these are still beneficial to investees, but will likely make some concession (for example regarding return, liquidity, default conditions, etc.) to support the investee’s mission. This is investing that is at its heart philanthropic rather than commercial. To be a social ‘investment’ some degree of financial return is essential, even if this means a high risk of getting only the initial investment amount back; but social impact is the priority. Everyone can be adequately compensated, but (in line with the ACSI definition) the mission of the investee is the principle beneficiary.

Each of these types of responsible investment has its part to play in creating a healthy society; none is necessarily better or more important than any other. The model responsible investor might therefore have three separate portfolios, each with different criteria and each having a different approach to the relationship with investees and how, for example, one might act in the event of a default. 

The key point is that the definitions relate to the objectives of the investor, not to the characteristics of the investment. In other words, responsible investment isn’t about asset classes, it’s about attitudes.

Using these definitions to clarify objectives will then enable social ventures to better understand investors. Some ‘social investment’ funds in the UK are squarely within this social investment definition, while others are closer to the definition of impact investors. Ventures seeking finance may also become better equipped to consider whether to go after ethical or impact capital which is more plentiful but also more demanding, or whether to seek social capital which is more beneficial but harder to secure. And by being better able to articulate the kind of investor they are seeking they are less likely to experience clashes of expectation.

As a final comment, I am not arguing here for any particular terms. Some proponents of impact investing in the US would likely consider that it includes what I have called social investing, though others would certainly include investments that many of us in the UK would not consider social. Indeed the use of ‘impact’ is even straying into the category of ethical (like investing in Apple being an impact investment because it’s low carbon). Whatever we call these categories, the point is that right now there’s too much confusion and contradiction. We’ll grow this market much more effectively if we can all agree on what we mean.


Photo credit: Michael Hull