Is social investment really about financing the third sector?

The momentum around social investment is leading to traditional third sector organisations losing out to new hybrid, profit with purpose businesses, warns the director of operations at the Scottish Community Re:Investment Trust Pauline Hinchion.

Since the establishment of the Social Investment Taskforce in 2000, the UK has witnessed the rapid development of a social investment market driven by successive centre left and centre right governments. In the intervening period, we have seen the creation of a plurality of different financial initiatives including social impact bonds (SIBs) and Social Investment Tax Relief (SITF); the raising of new social investment funds via models adapted from the venture capital world, and the creation of Big Society Capital, which lends to Social Investment Financial Intermediaries (SIFIs), and Community Development Finance Institutions (CDFIs). 

There is little doubt that social investment is altering the third sector, in particular the two complementary forces of investor returns and increasing focus on profitability, with some maintaining that social investment is bringing the third sector into the 21st Century. But to what extent are social investment developments also seeding new types of hybrid business models such as ‘Profit with Purpose’ models or ‘B Corp’ models? And what, if anything, do these hybrid business models actually have in common with the traditional third sector other than perhaps as competitors for the delivery of public and other services and also for finance?

It is no coincidence that these new hybrid business models are emerging at a time when social investment money is flowing into a third sector that is not utilising it quickly enough, or on a large enough scale. Traditional small scale frontline organisations that characterise most of the third sector seem unable or unwilling to make the transition to the business models that attract large social investment. Perhaps it was inevitable that this unwillingness or inability to adapt to meet the needs of social investors would result in traditional third sector organisations losing out to the new hybrid businesses.  

Before retiring as chair of Big Society Capital, Sir Ronald Cohen said that he fully “expects to see the growth of ‘for profit’ organisations with a defined social purpose”. These hybrid business models have recognisable profit motive business structures; operate in ways that are easily understood by private sector investors; and are able to offer attractive returns and perhaps even equity. Indeed, the Social Impact Investment Taskforce, which was established in 2013, specifically states that it is “….focused on the aim of attracting capital for investment in ‘profit distributing’ businesses that lock in a social mission and that deliver social impact”.  

Set against this, most third sector organisations are registered charities and it was perhaps never really properly appreciated by policy makers or financiers just how difficult it is to balance the competing needs of clients and/or communities and investors within a charitable framework and charitable regulation. 

If social investment capital is flowing to hybrids, where is the third sector to get money to drive forward its agenda?

So just fifteen years after the setting up of the Social Investment Taskforce, it would appear that the focus for social investment is shifting from the ‘not for profit’ third sector to the hybrid ‘profit with purpose’ business sector. But does the fact that hybrid businesses are accessing social investment make them part of the third sector? Right now there appears to be very little attention paid to that question as all models are subsumed under the social investment umbrella. But it is crucial that we understand the difference if we are to ensure that the third sector remains distinct from the private and public sectors and that it retains its focus on addressing the issues and needs of society as its primary function.  

In the summer an article by Henry Mintzberg in the Stanford Social Innovation Review expresses concern that as governments seek to move the delivery of public services into the hands of the private and third sectors, the lines between the two are blurring. Mintzberg argues that there is scope for improving society only when the third sector is strong, distinct and independent of both the private and public sectors, as only an unhindered third sector can lead the movement towards a more sustainable and just society. 

But if social investment capital is flowing to hybrids, where is the third sector to get money to drive forward its agenda, particularly against a backdrop of austerity and cut backs? Well, it is heartening to see that there is much to be positive about because many organisations are starting to finance themselves in different but perhaps more appropriate ways that are consistent with their values and community ethos. Rather than ‘High Net Worth’ individuals engaging in social investment, Dan Gregory’s Sept 2013 research shows that many third sector organisations would prefer to engage with ‘Low Net Worth’ individuals, which align better to the values or focus of their activities, such as residents within a community or individuals who are direct recipients of the activities.  

This is perhaps demonstrated by the speed at which these organisations are offering community share offers to purchase community businesses and windfarms; accessing reward and donation based Peer2Peer platforms; or as is the case in Scotland looking inwardly towards the third sector for investment. This is the model that Scottish Community Re:Investment Trust (SCRT) is developing. It is based on mutuality and the sharing of financial resources in order to retain capital and interest within the sector and magnify the social impact. Not only are these different financing mechanisms providing money but they are cementing social networks, values based networks and allowing communities to engage more fully with third sector organisations. I’m not sure the same can be said for hybrids.


Photo credit: Victor Casale