You owe me five farthings (and a social impact report)

The February 2015 OECD report Social Impact Investment – Building The Evidence Base described ‘Social Impact Investment’ as:  “the provision of finance to organisations addressing social needs with the explicit expectation of a measurable social, as well as financial, return”.  On that basis, there’s not much ‘Social Impact Investment’ going on in the UK social investment market.

Oranges & Lemons, written by Investing for Good and funded by Big Society Capital and the Esmee Fairbairn Foundation, is an assessment of ‘The State of Play of Impact Measurement among UK Social Investment Finance Intermediaries’ (SIFIs).

The report, published earlier this month, is probably not one that will attract significant numbers of readers working for frontline charities and social enterprises; many face a tough choice about whether to ignore it based on their scepticism about social investment or their scepticism about impact measurement but, nevertheless, it’s a useful and timely contribution to UK social investment’s understanding of itself.

The research is based on interviews with ten leading UK SIFIs. Unfortunately, while interviewees were prepared to talk about their approaches to impact measurement when investing in  social organisations* they were either unwilling or unable to provide any data related to specific deals. This means the research is primarily anecdotal: it’s essentially a report on what SIFIs say about their impact measurement processes.

Five of the key points emerging from the report are:

1. It is not clear what impact measurement is for (in the social investment market)
In the conclusions and recommendations section of the report, the authors pose the question: “If a SIFI were to ask itself, ‘What if I don’t do an impact report?’, ‘What if I don’t include x in my impact report?’… In reality, there is often little by way of consequence.

Instead the assumption is that impact reporting is ‘a noble thing to do, and good practice recommends it‘.

Even before getting into the detail, there is no clear consensus on whether the broad, overall point of impact measurement in social investment is to measure (and hopefully ultimately improve) the social impact of organisations and initiatives funded via social investment or to measure (and improve) the impact of social investment on those organisations. Currently, it seems to be a loosely conceptualised combination of the two.

2. It is not clear who measurement is for 
Most social impact investors# are not, on the evidence of this report, actively interested in social impact measurement. The authors note that: “SIFI’s investors were largely found to be satisified, and not to be actively demanding more information, specific kinds of information, or more standardisation, even though the reports themselves varied considerably.

While not addressed in the report, there is a wider issue of the public accountability of participants in the social investment market. Of the 10 SIFIs interviewed for the report, all have received some public money – either directly or through Big Society Capital – to fund their investments. At least 3, receive or have received the majority of their funding from either UK or devolved government.

It seems strange that as we approach the first £1 billion** of UK government funding for the social investment market, SIFIs (as a group) are not actively seeking to make themselves accountable to the public for the money that supports their industry and have no apparent mechanisms for demonstrating the social impact of the public money they receive. Principles aside, that’s likely to be a practical problem for them if/when social investment becomes less politically popular.

3. Lots of pre-deal work, not much post deal 
The majority of the impact assessment work currently undertaken by SIFIs takes place at the pre-deal stages. The approaches are different, some SIFIs operate general funds, others map particular social sectors and seek investments in those markets. When analysing specific bids, the approaches range from discussion-based ‘social due diligence’ – talking to organisations about what they do – to using a standard impact rating methodology for analysing all deals.

When it comes to deal-making, 2 out of 10 SIFIs don’t request investees set any specific Key Performance Indicators (KPIs) at all while, at the other end of the spectrum, 4 SIFIs ask investees to agree KPIs from a menu based on outcomes they (the SIFI) is seeking to achieve.

There is no evidence that impact is used as a basis for choosing one investment over another. The authors note that: “In the majority of cases, if an opportunity reaches the investment committee but doesn’t win investment, the reasons are predominantly financial.

The overall effect is that: “Pre-deal analysis can more as form of screen or impact hurdle, with financial considerations coming to the fore once it has been cleared.

Tellingly: “There were no cases of ‘impact defaults’, in which funds were withdrawn or investments written down on account either of insufficient impact data being reported, or of the impact data being reported showing that insufficient impact was being generated.

The point is not that ‘impact defaults’ are desirable but if they are not possible that’s in unclear how SIFIs investments can meaningfully be described as ‘impact investments’ when as the authors note, on this basis ‘impact is not an investment concern‘.

4. No connection between impact and price 
The authors note that: “There is little evidence for impact explicitly or directly moving price.” While there’s a sense that: “Investors may be prepared to take an extra risk for high impact” there’s no evidence of: “clear processes by which e.g a high impact organisation can be charged 3% for a loan whereas a lower impact organisation would pay 7%

This point is simultaneously vitally important to our explanation and understanding of ‘impact investment’ but also a potential red herring. Professor Alex Nicholls at Said Business School, in his work on ‘impact risk’, has usefully asked whether it’s correct to assume that organisations with potential for high social impact will necessarily offer a bigger financial risk than those with a lower potential impact.

It’s not necessarily logical or useful for SIFIs to offer ‘impact discounts’ -particularly given the challenges the authors highlight about generating independently audited data- but the rhetoric on social investment from politicians and some social investment leaders, is that they do.

It’s one of many issues where there’s a yawning gap between the social investment hype machine and the reality experienced by charities and social enterprises. On the one hand there’s a theoretical vision of a market where SIFIs demand that organisations achieve (and report on) measurable social outcomes and receive better investment deals as a result of doing so, on the other you have the reality where most SIFIs are using potential social impact as an enhanced screening process and asking for information back so that they can prepare case study-led impact reports for their funders.

The idea that ‘you can get a cheap loan if you can demonstrate your social impact’ is a pernicious, cynicism-inducing myth that SIFIs and social investment leaders can all play their part in squashing at every conceivable opportunity.

5. Everyone has a different system 
Perhaps unsurprisingly: “No off-the-shelf metholodologies are being used by SIFIs to measure their impact, and instead all are individually and unique.

This apparently means both that different SIFIs measure impact in different ways but also that individual SIFIs allow different investees to report their impact in different ways.

This is not necessarily wrong in either case. It doesn’t seem useful, either in terms of the responsibilities placed on the investee or the likely value of the data generated, to use the same model to assess the impact of a £25,000 bridging loan and a £2.5 million quasi-equity investment.

But the fact that all social investments are not usefully comparable does not mean that no social investments are usefully comparable at all. Oranges and Lemons recommends: (i) that more work is done to understand the best ways of measuring the impact of different types of investment and (ii) that SIFIs form a peer group ‘for the reading and reviewing of impact reports’.

These are sensible recommendations. It would be great if they helped SIFIs generate and publish more meaningful data (not necessarily more data). It would be even better if they helped SIFIs develop clearer ideas about who they’re generating data for and why.


*The report does not cover Social Impact Bonds (SIBs) involve a direct specific, relationship between outcomes and returns it isn’t useful to compare them to situation where SIFIs are choosing whether and how to combine impact measurement and finance.

#Investors providing money for SIFIs to invest

**Cumulative total of grants, investment funds and tax breaks since 2003 – mostly spent since 2010.

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Retreating to the bunker

If there’s one thing worse the swingeing cuts to public services, it’s the expectation of more swingeing cuts to public services and the evidence so far suggests both local and national battles for resources are going to get messy.

In one recent example, many will sympathise with the desire of health campaigners and GPs in the London Borough of Hackney to campaign for as much funding as possible allocated to frontline health services but some may question whether slagging off council funding for specialist voluntary sector public health initiatives is the most useful way of making that point.

Last week’s Hackney Gazette saw local campaign group, Hackney Coalition To Save the NHS take aim at Hackney Council’s Healthier Hackney Fund – a funding scheme set up by the council as (one, relatively small) part of their new responsibilities for local public health services under the 2012 Health and Social Care Act.

In its first year of operation the fund has awarded £370,000 to 32 projects run by charities and social enterprises with intention of finding: “new ways to tackle some of Hackney’s most complex health challenges such as smoking, mental health, substance misuse and sexual health.

In a storming interview with the Hackney Gazette, Bronwen Handyside from Hackney Coalition To Save the NHS explains that: “These are all good projects but they are niche services, they are quite specialised small projects.

And that: “I would prefer the money was allocated to the NHS which is suffering a haemorrhage of cash funds because of the £22billion cuts which are taking place.

Before adding: “We have a huge problem with the NHS being broken up and sold off to the private sector and the voluntary sector has been used as a stalking horse for the private sector – you might start off commissioning services to the voluntary and charity sector and you will eventually end up with the private sector.

Beyond the (perfectly legitimate) statment of principle, it’s not clear what Hackney Coalition To Save the NHS actually would actually like their council to do in this context.

As of 2013, Public Health is not part of the NHS and councils receive government funding to deliver it. Whether or not it would be desirable for Hackney Council to stop doing public health and send a cheque to the local CCG for general provision of local health services, it’s not an option that’s open to them.

While it might be acceptable for volunteer campaign groups to be unaware of (or uninterested in) the overall funding framework that councils operate within in, the Hackney Gazette article also contains quote from a local GP who, given his job, should know better.

Dr Nick Mann of Well Street Surgery notes that the £370,000 could’ve funded a ‘full clinical team’ for a year before storming: “At a time when basic medical services are under threat, it seems wrong to be further fragmenting the limited health budget.

Adding: “However well-meaning, this diversion of essential health funding will lead to further fragmentation, not integration, of health services in Hackney.

And that: “Voluntary organisations do great work, but cannot substitute for properly planned and funded public health services.

This, like the Coalition’s statement, is wrong on a basic level – the funding in question isn’t being ‘diverted’, it’s being spent for the purposes it’s allocated for, rather than on something else that Dr Mann thinks would be better – but that’s just the tip of his reductive iceberg.

The more important question is whether a £370,000 block of extra ‘properly planned and funded’ basic health services is a useful alternative to 32 community projects looking for new approaches to complex health challenges.

If you take £370,000 and split it between City and Hackney CCG’s 43 GP Practices they’d get just over £8,600 each. It’s £1.43 of extra basic service for each of Hackney’s 257379 residents. It’s 3% of the cost one GP appoitment per person.

None of these figures tell us anything much because you can’t make meaningful comparisons between general healthcare and the kind of projects that Healthier Hackney Fund is supporting. They’re not alternative forms of healthcare but they are projects that – in various different ways – aim to help people to be less dependent on healthcare.

Dr Mann takes the view that: “Voluntary organisations do great work, but cannot substitute for properly planned and funded public health services.

This may be true but it presuppposes: (a) that we’d he’d consider ‘properly planned and funded public health services’ are an option and (b) that they’re the best solution to ‘complex health challenges’.

It’s equally true that GPs and hospitals should not be put in the position of substituting for services that could be better provided by the voluntary sector.

One of the projects funded by the Healthier Hackney Fund is: “Hackney Posh Club – a weekly entertainment and social club for elderly and older people, which will reduce social isolation and prevent the onset of mental ill health.” GPs cannot cure loneliness – and generalist public health information delivered by medical professionals isn’t much help either – but effective voluntary sector projects may be able to reduce it.

It’s understandable that GPs and campaigners feel and embattled, and it’s right that they do defend core services but not expense of being open to new ideas that might ultimatly help them and their patients more than a bit more of what they’re already doing.

Basic medical services are vitally important but arguing that funding for those services should always take precedence over new ideas and projects that might reduce the need for those services – and help people general medical professionals are not best placed to help – is ultimately just an argument for things to get worse more slowly.

The challenge for charities and social enterprises operating in these fields is to develop projects and services that genuinely do make things better.

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Disparate measures

I haven’t been blogging much over the past few months, due to my work on the (now published) report of The Alternative Commission on Social Investment. There’s been lots of reports, events and launches during that time that are worth catching up so, while I’ll also hopefully be responding to new stuff, I’m going to be posting a few delayed responses to February and March’s biggest stories!

Those tracking the rise of ‘big data’ will have been particularly interested in this Civil Society story from early March, which saw Directory of Social Change boss Debra Allcock Tyler take a series of engagingly absurd swipes at the growing popularity of ‘data’ and measurement.

Speaking at an NPC seminar – and apparently shouldering the burden of ensuring the discussion didn’t subside into a slurry of polite agreement – Allcock Tyler warned that: “A great deal of the time data is pointless” before adding: “Very often it is dangerous and can be used against us and sometimes it takes away precious resources from other things that we might more usefully do“. She then offered a further warning that “vast majority of people” analysing data are not: “good people who are sensible and think things through and understand the broader picture.

We are not told whether any of those present asked where that ‘vast majority’ figure came from or what percentage of voluntary sector data analysts Allcok Tyler believes are sensible broad picture types but, while the rhetorical approach is exaggeratedly combative, few would disagree with the underlying point that collecting the wrong data and using it badly is undesirable.

Some of Allcock Tyler’s subsequent points are more contentious and raise, albeit in an overly simplistic way, big questions for the data driven industry of impact measurement.

Too small for stats

One is that: “The vast majority of good work that is done by good people in this country is done at very very small charities or community groups working on a local basis where they know people.

And therefore: “It isn’t the data about Mrs. Jones going to the social centre that matters to that charity – it’s the fact that they know [they are doing a good job] because she smiles. They are not going to count the number of times that she smiles. People at local levels don’t engage in charitable activity because Mrs Jones is going to feel 8 per cent happier.

This is a statement that will intuitively make sense to huge numbers of people working or volunteering for small charities, social enterprises and other community groups –  many of whom feel ground down by years of councils and grant funders demanding they justify their actions by monotonously ticking boxes that seem irrelevant and/or incomprehensible to them and meaningless to the people who use their services.

What it’s not is an argument about the value of data. Data is: ‘Facts and statistics collected together for reference or analysis’. Whether or not Mrs Jones smiles is data but it’s very limited data.

The fact that Mrs Jones has: (a) turned up at/allowed herself to be taken to the centre and (b) is smiling, does tell the people running the social centre something about her feelings about their service but it doesn’t, for example, tell them where she is on the spectrum between ‘delighted by what the centre has to offer’ and ‘too lonely and/or polite to explain that she’d like it more if they offered something completely different’.

It’s true we don’t ‘engage in charitable activity because Mrs Jones is going to feel 8 per cent happier’ but hopefully we do engage charitable activity in order to do something useful. This particular situation may not call for a complex spreadsheet or an SROI report but surely we can accept that there may be some relevant information about whether Mrs Jones is getting the help she wants and needs beyond our own personal opinion?

All you need is love

The implication of the final Allcock Tyler quote in the Civil Society article is that in many situations, for her, the answer to that question may actually be “no”.

She warns that: “As part of a data revolution thing, it can be incredibly dangerous because people say if you can’t measure it, it’s not worth doing – but actually some things you can’t measure. There is something about the nature of charitable endeavour which is about love and trust and faith and not about numbers and data.”

This is, once again, a statement many of us will instinctively sympathise with but equally, it’s a line that can be (and often is) used to explain why a particular organisation is using other people’s money to continue to do the same stuff decade after decade irrespective of whether it’s any use to the people they claim to exist to help.

More than anything, this discussion illustrates the difficulty that our growing impact measurement industry in convincing the voluntary sector (and social enterprises) that it is on their side and can offer them something they either want or need.

In theory, organisations should welcome the growing opportunities to decide for themselves what data – whether or not its focused primarily on numbers – can best help to understand, explain and improve what they do. In practice, not many do and while Allcock Tyler worries about the data revolution, much of the impact measurement activity that is happening – beyond the world of SIBs and other large scale PbR contracts – seems to take place in funder-designated sidings that even funders have forgotten about.

The questions about how local organisations decide what they’re doing, who they’re doing it for and whether it’s succeeding are more important than ever. We need to find more practical and proportionate ways to answer them.

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After the Gold Rush – The Report of the Alternative Commission on Social Investment

Some readers may have noticed that there hasn’t been a blog post here for a while. That’s not because there hasn’t been anything going on in UK social enterprise, it’s because I’ve been working on a project called The Alternative Commission on Social Investment. The press release below explains what it’s all about.

Our report is out now: the full version is here and there’s a shorter version here.

It would be great to hear what you think – either via email or below.

Normal blogging service will be resumed shortly.

NEWS RELEASE – FOR RELEASE AT MIDNIGHT THURSDAY 26th MARCH 2015

Commission proposes more open, social and responsive alternatives to rescue social investment from hype and hubris

In a report After the Gold Rush published today, Friday 27th March, the Alternative Commission on Social Investment called for less hype, greater transparency from investors, changes to Big Society Capital, and a more principled approach to social investment which puts charities and social enterprises at its heart.

The Commission explored, through a series of roundtables, interviews and research, the access to finance needs of social sector organisations and whether social investment, as currently conceived, can meet that need. The report proposes 50 ways to make social investment more successful and more social.

Through its work, the Commission sought to be more inclusive, more diverse and less London-focused than much of the social investment industry. The work of the Commission Team was guided by 14 Commissioners, all of whom have some interest and knowledge of social investment but who offer diverse experiences and perspectives.

  • Commission Secretariat and Managing Director of Social Spider CIC, David Floyd said “We often hear from Ministers, champions of social investment and the G8 that the UK is a world leader in social investment. Yet for charities and social entrepreneurs here in the UK, it doesn’t feel like that. The Alternative Commission on Social Investment was set up to ask why and to make some practical suggestions as to how things could be improved.”
  • Caroline Mason, Chief Executive of Esmée Fairbairn Foundation said “I welcome the publication of this timely and revealing report. Social investment is a wonderful tool but to enable social change we need to improve and develop on its execution. If social investment is to help charities and social enterprises improve the quality of people’s lives across the UK, then their voices need to be central in policy, market and product development.”
  • Professor Alex Nicholls, one of the Commissioners and Professor of Social Entrepreneurship at the Saïd Business School, Oxford University said “Since the financial crisis, we have seen increasing interest in how capital might be harnessed for social good. But the danger here is that we simply recreate models from mainstream financial markets and expect them to work in the social sector, while at the same time letting social values succumb to the power of capital. Instead, we need fairer, more open and inclusive investment models that can help tackle inequality.”

Recommendations

The Commission’s 10 key recommendations are (see report for full wording):

  1. Social investors, including Big Society Capital to go much further in publishing information about the investments they make.
  2. Social investors to be clear about how social aspects are weighed up in their investment approach.
  3. A reconsideration of the role of Big Society Capital, prioritising its impact over its own existence.
  4. Unravelling the mix between ‘the people’s’ Unclaimed Assets and money invested by the Merlin banks to allow Big Society Capital to better meet demand.
  5. Politicians and advocates of social investment to minimise social investment hype.
  6. Government policy to move away from looking to grow the relatively tiny “social investment market” for its own sake and focus instead more on the needs of charities and social enterprises
  7. The development of a set of defining principles for truly social investments
  8. Social investors’ approaches, staff and locations to better reflect and understand the market they are seeking to serve.
  9. A Compare the Market or Trip Advisor type tool which enables charities and social enterprises to rate their experiences of social investors.
  10. Large charities and social enterprises to invest in other social sector organisations through peer-to peer models.

Ends

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The squeezed middle

Social investment finance intermediaries, often known by the acronym, SIFIs, don’t generally enjoy a positive reputation among UK charities and social enterprises. As with MPs, many of us like and respect SIFIs and their employees individually but the emerging industry is not popular.

That’s mainly because, since social investment hit us (in a big way) in 2012, there’s at least been a perception that the government (in particular) has put loads of money into subsidising the process of and support for social investment, while not spending enough making social investment affordable or useful for charities and social enterprises.

As someone who talks to and works with lots of people in the intermediary business, I’m yet to meet one I’ve disliked or felt was in it for the money but genuine intentions are not the same thing as delivering value.

Never one to play to the gallery, Clearly So boss, Rod Schwartz uses his latest column in Third Sector to make the case for SIFIs (or ‘impact investment intermediaries’ as he’s calls them, possibly in order to communicate with a global audience) charging funders £1,000 a day for their services.

Schwartz’s motivation to speak out is a conference-based conversation with a funder who claims that intermediaries are “incredibly greedy” and that their £1,000 a day charges are ‘indecent'; Schwartz responds with the request that we ‘look a bit deeper’.

The fact that Schwartz is initiating this conversation at all is positive and increases the credibility of both Schwartz himself and the wider ‘intermediary’ sector. He deserves respect for tackling that issue head on rather than blithely pretending it doesn’t exist.

He’s also at least partly right, because a large part of his response to the funder’s charge of indecent greediness consists of an explanation of why buying a set number of days of professional services, delivered by skilled people, is often expensive: “Behind each professional is a team that carries out HR, administration, finance, legal and so on, but whom you don’t bill for their time. In addition, there are sales teams that generate costs and do not win every pitch – and that, even if successful, cannot bill that time to the client. Nearly half the fee is eaten up this way.

This is pretty uncontroversial stuff in itself and strong rebuttal to anyone who really thinks the/a problem with intermediaries is the grasping personal character of the individuals working for them.

Unfortunately, when Schwartz moves beyond the general, rather defending intermediaries fees’ based on either commercial or social value they deliver, he ends up on more contentious ground: firstly by explaining that intermediaries are expensive because they’re based in London, then by pointing out that they do complicated work on ‘transactions’ that ‘are no less complicated than in the mainstream’.

It seems that, possibly due to a decade or two of exposure to voluntary sector thinking, Schwartz has gradually ditched venerable market-based approaches to pricing and value, and is now on the verge of coming out as a supporter of our umbrella bodies’ much-loved, if semi-mythical, ‘full cost recovery’ model.

I’ve been to the workshops and I know that in a market system this stuff  is not really very complicated at all. Intermediaries either prove their commercial value to their customers – a funder pays £10,000 for 10 days work and is satisfied that at least £10,000 of value is delivered to their organisation as a result – or they don’t.

The funder doesn’t need to know where the intermediary is based or how complicated their work is, they just need to know that they’re getting value for money. And frankly, if an intermediary can convince you their input will make the difference between you making a £1million investment that clearly delivers major social returns and some financial return, and making a £1million investment that loses you money while delivering nothing much, that there’s no obvious reason why they shouldn’t earn their £10k in 5 days.

Unfortunately (or otherwise) most intermediary activity in the UK takes place in the dark and distorted world of subsidised markets, where the label ‘intermediary’ or SIFI covers organisations who deliver (some of) a wide variety of different functions, including managing investment funds on behalf of government and other investors, and supporting organisations to become ‘investment ready’.

Intermediaries whose role is to manage and invest social investment funds on behalf of government and other non-City-based investors, or to support organisations as providers on a national programme of government grant-funded investment readiness support, such as ICRF, do not need to based in London for practical reasons but they generally are based there.

Currently some non-London-based charities and social enterprises receiving grant-funded consultancy from London-based intermediaries find themselves paying both high day rates – because intermediaries have to fund the high living costs of their London-based consultants – and peak time travel costs for those consultants to travel up from London for the day.

Fortunately, even in this deeply distorted marketplace, genuine market values still offer an obvious solution. If you’re an ICRF or Big Potential provider and the cost of living in London is forcing up your day rate and leading you to pile huge travel expenses on top, you can move. You can get somewhere quite nice in, for example, Leeds for £200,000.

When it comes to the problem of intermediaries being so costly because their work is complicated, market philosophy once again offers a stark, clear route through the swamp of subsidy. That is, that if intermediaries’ work is so complicated that it’s not possible for them to do it for the money available, they should stop doing it. If all these skilled people quit the market, and the market needs them, it will pay them more to come back.

Or it won’t. It probably won’t but plenty of us want to go and live on full cost recovery island and many would like to fly there on Concorde, sadly (social?) business doesn’t work like that and we have to choose whether or not to do what we want to do for what we can get for doing it.

Schwartz illustrates with his own discussion when he says:

I asked him what his outfit paid its lawyers a day, ‘That’s different,’ he said. ‘What about your accountants?’ I asked.

He argued that too was different.

I’m no legal expert but I understand that being a legal aid-funded defence lawyer for a penniless person is not, in itself, less complicated and skill dependent than being a privately-funded defence lawyer for a billionaire.

It is a bit less lucrative. In June 2013, Law Gazette reported that within the UK’s legal aid system (according to The Bar Council): “under the current rates, the most experienced silks doing the most serious cases such as murder get paid £550 a day (covering a full day in court and two hours preparation). Half of that has to be taken out to cover overheads… So in reality, she said they earn £275 a day.  

Fortunately, our government is now socking it to the highly subsidised  fat cats so that:  “Under the proposed cuts, those figures will fall to £350 and £175 respectively.

The point is not that it’s right that experienced lawyers are now being paid £175 per day (or that there’s any directly comparison between their work and that of intermediaries) but that highly skilled professionals are often paid extremely badly in situations where their work is not commercial.

We’re a nation with some strange approaches to valuing social good – in many local areas the average hourly rate the state pays people to care for an old person is less than the average hourly rate private individuals pay people to walk their dog – but it’s not clear that social investment intermediaries are getting a specifically bad deal in non-commercial markets. Where their customers are paying directly, they just need to get better at selling their services.

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Purpose unclear

One of the most baffling developments of 2014 was the emergence (at least in social enterprise policy-world) of the ‘Profit-with-Purpose’ business.

For those who missed it, the ‘Profit-with-Purpose’ business is an idea primarily championed by social entrepreneur support provider, Unltd, to explain their support ‘for-profit’ businesses (companies limited-by-shares) dedicated to fulfilling a social mission.

Unltd ceo, Cliff Prior, chaired the Mission Alignment Working Group (MAWG) of G8 Social Impact Investment Taskforce and their report explains the idea at length.

Prior also explains the idea (to some extent) in this interview with Pioneers Post, where he responds to criticism from Unltd’s former partners in Scotland, Can and Senscot, who ended their relationship with the storming assertion: “UnLtd has developed into one of the UK’s leading advocates against the regulation of social enterprise and for the inclusion of private profit companies in the sector.

While I understand that many readers are experts in the minutiae of social enterprise policy debates present and past, less firmly embedded readers may appreciate some explanation of the terrain on which this battle is being fought.

Very roughly, it’s this (from the MAWG report, p18): “From a legal point of view, the main difference between profit-with-purpose business and social or solidarity enterprise is the degree of flexibility regarding the distribution of profits and use of assets.

What, in a UK context, is the nature of the inflexibility that Unltd are railing against?

Umbrella body, Social Enterprise UK, state that in order to be considered a social enterprise (for the purposes of membership): “the majority (more than 50%) of an organisation’s profits should be reinvested to further its social or environmental mission.

That’s a pretty flexible definition, even without creative interpretation, it enables a company to pay 49.9% of its profits out to private investors and retain the other 50.1% in the company ever year if appropriate.

When it comes to assets, SEUK’s position is: “We believe that an asset-lock can be effective in ensuring that a social enterprise operates in the wider interests of society for perpetuity and is not at risk of sale. But we recognise that many social enterprises receive no public funds or assets. Some have benefited from considerable personal investment on the part of the entrepreneur and need the money back.

So the official social enterprise position on profits and assets – to the extent that there is one – is that a social enterprise can distribute half its profits to private investors and doesn’t need to have any sort of asset lock (as long it can bear the ignominy of failing to pursue an approach that SEUK believes can be effective).

Elvis and Kresse, the business used in the Pioneers Post article as an example of a ‘profit-with-purpose’ business is (entitled to call itself) a social enterprise (if it wants to) by the SEUK’s definition.

That said, there’s absolutely no reason why a socially-minded entrepreneur should sign-up to SEUK’s commitments if they don’t want to. In that situation, they can start an ethical business like Ecotricity or Lush, that does business in the open market using a conventional ‘for-profit’ structure – attracting ethically-minded customers on the basis of the way they do business rather than their corporate set-up.

In the UK context, a ‘profit-for-purpose’ apparently fills the gap between social enterprises and ethical businesses. Look carefully. Can you see it yet?

Profit can be good

Despite, this deeply inauspicious premise, Prior and the Unltd team are neither bad nor stupid people so there must be some reasons why they’ve ended up on this bizarre wild goose chase.

There’s at least one good one, based on what are (whether or not you agree with them), honorable principles. In a recent discussion on social media, Dan Lehner, formerly Head of Ventures at Unltd and now working at CLS social enterprise/profit-for-purpose business, Oomph!, explained his support for the thinking that mutated in ‘profit-for-purpose': “My biggest reason to push the issue is because I think there’s need for a new level of awareness-raising (partially with consumers/government and funders/investors but mostly with really talented, imaginative, ambitious entrepreneurs) that it’s ok to make money out of social purpose – if social outcomes are genuinely achieved and evidenced.

Why shouldn’t people who want to earn a decent living, provide well for themselves and their families and make the world a better place in the process be encouraged to do so? It’s difficult to imagine many of us in social enterprise world offering any suggestions as to why not (although some of might argue that that’s often possible using a social enterprise structure, too).

Why should, Unltd, a charity set-up to support ‘social entrepreneurs’ (rather than ‘social enterprises) support those people? Senscot and Can, amongst others, clearly do have some suggestions but others of us are pretty relaxed about that, too – School for Social Entrepreneurs is another example of an organisation that supports ‘social entrepreneurs’ without specifying the type of organisation they have to work for or set-up.

Two bald men lose will to live during ethically-produced comb brawl

The less principled driver of ‘profit-for-purpose’ is as one skirmish in the distastefully absurd scrap over the £400million worth of ‘unclaimed assets’ allocated for investment in ‘Social Sector Organisations’ via the government’s semi-detached social investment wholesale finance institution, Big Society Capital.

The starting point is that: “The statute under which BSC was established defines third sector (or social sector) organisations as those that ‘exist wholly or mainly to provide benefits for society or the environment’. BSC has interpreted this to include regulated social sector organisations such as charities, Community Interest Companies or Community Benefit Societies as well as some profit-making companies or enterprises that have a clear social mission where these entities can meet the specific criteria set out in the attached Governance Agreement.

The ‘Governance Agreement’ definition combines the clarity of wool with the flexibility of nylon to deliver a set of criteria that virtually any business could meet if it could be bothered.

It states that: “the payout of cumulative profit after tax to shareholders will be capped at 50% over time” but doesn’t specify how much time so, presumably, as long as time (or your business) doesn’t stop you can pay as much profit out to private shareholders as you like on the basis that you’re firmly intending to start the process of reinvesting the majority of overall profit generated over the lifetime of the business at some as-yet-undefined point.

Big Society Capital’s view (as I understand it) is that a key reason why the social investment market didn’t really get going in 2013/14 was that social investors were spooked by this potentially confusing situation.

In August 2013, BSC ceo Nick O’Donohoe stated: “We need to more clearly segment the social impact investment market and also define more specifically what should count as a social enterprise.” and that: “That definition, in my view, will need to be driven by a specific legal form or golden share which guarantees a lock on social mission and also allows capital providers to earn a reasonable return consistent with the risks they are taking.

‘Profit-with-Purpose’ clarifies that situation so that, in the words of MAWG report, p19, there is: “a way for social investors to identify eligible profit-with-purpose businesses with confidence and familiarity.

In a UK context, this means a way for social investment intermediaries to investment UK citizens’ unclaimed assets in businesses that are not ‘regulated social sector organisations’.

Few within either civil society or social investment world disagree with the idea that if government is going to provide money for a social investment and (tax relief for it) it should provide a regulated registration system for those eligible to receive it (particularly if their social mission is not already regulated in some other way).

My strong expectation is that vast majority of organisation who could be bothered to register would meet SEUK’s definition of a social enterprise. For Unltd, the idea that might be a few that might not but would be keen to receive ‘social investment’ is apparently justification for the creation of ‘A New Sector’.

The more worthwhile stuff that’s ignored

BSC’s money is a relatively small, specific chunk of cash set aside to support ‘Social Sector Organisations’. The parochial battle over whether (or which) private companies should be eligible to receive it ignores the far bigger and more interesting discussion about the promotion of social purposeful activity in the private sector.

Dan Lehner’s point that: ‘it’s ok to make money out of social purpose – if social outcomes are genuinely achieved and evidenced‘ – is an important one but the last thing it suggests is the need for the creation of ‘A New Sector’ of businesses for a bemused public to attempt to get their head around.

Whether we’re using the term ‘social investment’ or ‘impact investment’ there’s huge potential investors to invest in companies and customers to buy products based on the social good generate by those activities. This is not necessarily about companies demonstrating their impact through SROI, it could be about being Living Wage Employers, using sustainable materials or demonstrating their support for their local community.

If what the company does with its profits and assets doesn’t matter, then why else should an investor be interested in what it is as opposed to what to what it does? If an investor is investing what an organisation does, social requirements can be just as usefully written into an investment agreement as written into a company’s mem and arts. If a social entrepreneur running a private business doesn’t what their social mission distorted by an investor, they should get that mission written into the deal.

Shoving the good stuff done in the private sector into the cul-de-sac of ‘Profit-for-Purpose’ businesses serves no one other than a support organisation struggling to explain what it does, and some social investment organisations struggling to do what they’re meant to do.

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Pretty good year

If you want to know what’s been happening in social investment in 2014, the answer is that Iain Duncan Smith (IDS) thinks it’s going brilliantly and I think the market is experiencing a ‘different level of success’. That’s the headline news in Big Society Capital (BSC) CEO, Nick O’Donohoe’s blog-based review of the year.

It’s an honour that O’Donohoe is taking my views into account in his assessment of the current challenges facing his organisation but (while I can’t speak for IDS) he’s wrong to suggest that I’m one the ‘stakeholders’ continuing to ‘judge success or failure by a rather one dimensional yardstick’.

As regular readers will know, the vast majority of my blogs on social investment over the years have explained why the market is failing at least two different interest groups in at least two completely different ways but O’Donohoe is clearly right to highlight the difficulties BSC faces in supporting the development of a social investment market that works for different people who want different things to happen.

Ironically, the one unequivocal aim that BSC has – to support the development of the social investment market – is a ‘yardstick’ that no one apart from BSC staff and trustees, and possibly few civil servants, is particularly interested in (in itself).

In fact, the main argument for the existence of ‘the UK social investment market’ as a specific sector or space within the UK economy is the fact the BSC exists to develop it and the clearest, if not necessarily the most (socially) useful way of outlining that markets parameters is based on whether or not an activity is something that BSC could invest in.

O’Donohoe’s blog post reviews progress against in priorities areas outlined in BSC’s current strategy (launched in May 2014): small and medium-sized charities; innovation; mass participation; scale. It encompasses a wide range of activities from community shares to hedge fund-led housing investments that BSC invests but which have nothing much to do with each other plus some – such as Nominet Trust’s grants programme – that BSC isn’t involved in.

This not a bad thing. It’s vastly preferable to BSC investing in a narrow range of activities relevant to a tiny segment of the social economy and taking no interest in anything other funders/investors are doing but it doesn’t do much to alleviate confusion about what the social investment market is and what BSC is ultimately for.

For all the positive news in 2014, there is no realistic expectation that Nick Hurd’s claim on BSC’s launch day that: “For many years, charities and social enterprises have been telling government how hard it is to access long-term capital. We have listened and within two years have delivered a new institution that will make it easier” – will ever be fulfilled in the sense that that most observers would understand the terms ‘make’ and ‘easier’.

And Prime Minister David Cameron’s statement that day that social investment: “is a self-sustaining, independent market that’s going to help build the big society” – now reads like a message in a bottle from a land beyond our comprehension.

2014 has seen BSC gradually move beyond its initial failure to get money out the door to distribute its own funds with growing competence primarily (if not exclusively) into funds and institutions intending to make relatively safe asset-backed investments, while also providing some of the financial muscle to back up the government’s (as-yet undimmed) enthusiasm for Social Impact Bonds.

It’s also successfully completed part two of its lobbying operation to secure the introduction of Social Investment Tax Relief, with the eligible limit raised to £5million in the Chancellor’s Autumn Statement.

Alongside this activity, BSC has been furiously seeking ways to outsource the wider obligations bestowed on it by the fundamentally political nature of its creation. In particular, providing finance for small charities and social enterprises (which, in reality, is most of them) – which O’Donohoe told me in February is ‘just not possible’ on a commercial basis.

We’ve seen Big Lottery Fund step in to take some of the pressure off with the (much trailed build up to the) launch of the £150million Power to Change grant fund for ‘sustainable community-led enterprises’.

Behind the scenes, BSC and Big Lottery have also been working together to develop a new institution to work with intermediaries to provide blended finance/mixed-funding products/loans with grants (delete according to taste) to organisations who aren’t in a position to take on fully commercial investment.

While it’s not exactly prizes for anyone, there’s been enough happening to keep enough ‘stakeholders’ happy to keep some kind of social investment show on the road – even before you consider the phenomenal pdf action generated by monumental solution-in-search-of-a-problem of the year ‘Profit with Purpose Businesses‘.

When you add in success stories like community shares, the messier social investment market that’s emerged in 2014 is more useful to more organisations and (hopefully, ultimately) more people than the pointless venture capital tribute act that was on offer in 2012.

It’s less clear what moral or functional principles, if any, hold it together and, as a result, on what basis any forthcoming battles for BSC resources will be fought. Dan Gregory’s question: ‘What’s so social about social investment anyway?‘ has not been answered.

If the UK social investment market of 2015 was a social enterprise emerging from a programme of investment readiness support what would it’s shiny, new elevator pitch be?

Another BSC employee, Development Director, Danyal Sattar, has recently published a series of blogs that provide a brilliant overview of the ‘what’ of social investment but still don’t really address the why.

The Alternative Commission on Social Investment is not going to provide a single, direct answer to that question but hopefully it will provide some useful suggestions on what a more social ‘social investment market’ could look like.

2014 has been a pretty good year for UK social investment. It’s a year that seen most people working in social investment move decisively beyond rhetoric towards doing. In 2015, it may become clearer what we’re doing and why.

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