The longer-than-you-might-think history of social investment

Rhodri Davies of the Charities Aid Foundation (CAF) has recently written a book on the history of philanthropy. A long time before Sir Ronald Cohen, Big Society Capital and the social investment finance intermediaries, philanthropists were investing to improves peoples lives.

Social investment seems like the archetypal ‘new phenomenon’. The idea that the desire to achieve social good can be squared with a desire to deliver a financial return is often presented as something totally revolutionary: an “idea whose time has come”, and one which could never have existed before this moment in time. However, as with so many ‘new’ phenomena, social investment is not really new at all.

In my new book Public Good by Private Means: How Philanthropy Shapes Britain, I consider the history of philanthropy in this country and what it tells us about philanthropy’s role in modern society. One theme that emerges is that the lines between philanthropy, investment and business were often blurred in the past; and the idea of blending approaches from all three would not have struck the philanthropists of yesterday as remotely odd.

For instance, the 17th-Century London merchant Thomas Firmin, who was renowned for his philanthropic know-how, also experimented with a social investment approach. He established a series of projects in London for the “imploying (sic) of the poor” in which he found work for over 1,600 spinners and weavers. He ran these on a social enterprise model; investing a large amount of his own money in order to sustain businesses which would provide employment opportunities despite the fact that this came at the cost of commercial viability, because he viewed the projects as “thrifty philanthropy rather than loss-making businesses”.

Like many modern social investors, Firmin had one eye on a viable exit strategy: his plan was to prove the merit of his approach (in terms of the social benefits of employment for the spinners and weavers; all of whom were lifted out of poverty and some of whom would be able to go on and find employment in fully commercial firms), and convince the government to take over from him. Sadly, however, he proved to be too far ahead of his time and had little success in influencing the state to put money into his projects.

Firmin was perhaps an exceptional case, but in the 18th century a model of pooled social investment arose in the form of the Charitable Corporation, which would allow numerous investors to come together to use their money for both social and financial purposes. The Charitable Corporation was based on a model know as the “mount of piety” (monte di pieta) that had proved very successful in many Catholic Countries around Europe.

The idea behind this was to leverage the charitable and religious motivations of the wealthy by encouraging them to invest in a fund which would then be used to make affordable, below-market loans to the poor. Sadly, despite the merit of the approach, the Charitable Corporation was doomed to fail due to a simple case of human weakness: a number of the directors were guilty of embezzling funds and the organisation collapsed. A cautionary tale even today, one is tempted to think.

But fast forward a hundred years or so and we find perhaps the most successful, and certainly well-known, example of a social investment approach being used by our forebears. In London, in the mid to late 19th century, and even into the early decades of the 20th, there were a growing number of organisations in the housing sector that sought to build affordable homes for the working classes by raising capital from socially-motivated investors.

This became known as “5% philanthropy” (or sometimes 4% philanthropy) because the investors were paid a flat rate of interest on their investment from the revenue from renting the properties which was below market rate, on the basis that they were willing to sacrifice some financial return in recognition of the social benefits of providing low-cost, habitable accommodation for the working classes.

Many big names of the philanthropic world of late-Victorian London – such as Octavia Hill, Nathan Rothschild and Edward Guinness – got involved in 5% philanthropy, and organisations which promoted it, such as the East End Dwellings Company, The Metropolitan Association and the Peabody Trust (George Peabody's statue in London pictured above) left behind many buildings that are still standing today.

The lesson from looking at history seems to be that strict distinctions between philanthropy, investing and business are a relatively modern phenomenon. Perhaps, then, the reason that the concept of social investment does feel new to us is that we have become too constricted by these definitions over time. Only now are we starting to realise that by blurring the lines – as our forebears often did without even thinking about it – we can widen the range of options when it comes to addressing social problems and thus potentially find new solutions.


Photo credit: Denis Barber