Following on from my recent post responding to Robbie Davison’s insightful report ‘Does Social Finance Understand Social Need’, Nick Temple pointed me in the direction of this post from Clearly So’s Rod Schwartz.
I don’t know Schwartz personally but he’s always seemed, from blog posts and conference talks, to be one of the more thoughtful voices in the world of social investment. While I profoundly disagree key elements of his latest post, it certainly makes a valuable contribution to the debate.
The title of his blog post ‘Social Finance: The Case for Helping the Least Needy’ has the potential to be misinterpreted. Schwartz is not calling for social finance to be directed towards helping the least needy people in society, he’s calling for social finance to targeted at the least needy companies – those who are most likely to be able to take on investment and pay it back.
His initial argument is that charitable foundations need to be more pragmatic about assuming the riskiest positions in deals that also involve private investors: “On occasions they are asked to assume the ‘first loss’, or take a ‘capped return’, or sometimes a combination of the two. A sense of indignation emerges that their capital is being exploited so that those with a market return requirement can profit from social investment transactions they would otherwise not participate in.“
For Schwartz, the point is that without the prospect of a market return, the private investors wouldn’t invest at all and the investee wouldn’t get the money they need. And the fact that private investors might be getting better deal doesn’t, as of itself, mean that the charitable foundation is getting a bad one: “These foundations would willingly offer grants where 100% loss of funding is assured. But by using their capital in structured transactions sometimes far more social impact can be generated, AND they might see some return. Not to do so just because other investors (with very different criteria, beneficiaries and rules) might do well seems odd and reduces social impact generated.“
That position seems fair enough to me. I’ve got no objection in principle to charitable foundations (or government-backed social investors) investing in a way that enables social enterprises to draw in further investment from investors who don’t share their social mission. Any grant to an organisation with an overdraft facility from a high street bank is doing that to some extent.
By extension, I accept Schwartz’s point that charitable and social investors shouldn’t avoid investing in ‘those social enterprises or projects which are close to viable’ simply on the basis of their near-viability.
Where I profoundly disagree with Schwartz is that the correct approach is to do the exact opposite: “To get the most out of our money, a critical discipline in today’s capital-starved times, and generate the most social impact, we need to start with the least needy and work our way backwards.”
Schwartz is right to the extent that social enterprise or projects that can’t be sustained, can’t continue to deliver a positive social impact. The problem he ignores is that there’s no direct correlation between the relative commercially viability of social enterprises and projects, and the importance or severity of the social needs they’re attempting to have an impact on.
The phrase ‘get the most out of our money’ apparently means ‘get the highest possible volume of socially-impactful stuff, irrespective of the specific nature of that stuff.
Helping a busy office worker improve their work-life balance and giving a pensioner a chance to attend keep fit classes are two possible ways of delivering positive social impact. Enabling someone with learning difficulties to live an independent life or helping someone to manage their diabetes are two more ways to deliver a positive social impact.
Social enterprises or projects doing any of these things could be worthy candidates for social investment but a social investment market that allocates investment to one social purpose or another primarily on the basis of relative commercial viability will not play are very effective role in tackling social need.
As Robbie Davison’s report makes clear. Often social enterprises and projects in the most deprived areas are least likely to be commercially viable because the people who live in those areas are less likely to be able to pay for things. By Schwartz’s logic social investors could put their money into supporting lots of near viable organisations in better-off areas – which would generate a high volume of positive social impact – while leaving deprived areas to rot.
As Nick Temple’s ‘horses for courses’ piece in Third Sector suggests, there is (rightly) a place in the social investment landscape for low-risk, large scale investments but if we’re going to develop a social investment eco-system that, as a whole, provides an effective response to social need, then Schwartz’s starting point is wrong.
It’s vitally important that our social investment eco-system develops approaches that can manage the trade-offs between short-term financial viability, innovation and social need. That means finding ways to invest in risky social enterprises and projects that have the potential to deliver big social impacts. And also finding ways to invest in less commercially viable social enterprises and projects that tackle the most severe social needs.