Invested interests

It’s always worth reading Laurence De Marco’s weekly Senscot social enterprise e-mail bulletin. One of many reasons for that is Laurence is one of the few voices in the UK social enterprise support sector to offer anything remotely resembling clear position on social investment.

This week the Bulletin includes a link to Senscot’s discussion paper on Social Investment in Scotland which merits wider consideration by those of us working in the rest of the UK and beyond. The paper explores the role of the UK’s government’s social investment wholesale finance institution, Big Society Capital, points out why its approach is ‘fundamentally flawed’ and suggests a ‘Scottish Community Bank’ as an alternative.

Roughly speaking there’s three broad positions you can take on the UK government’s version of social investment right now:

1. The Senscot position – social investment (as put forward by the UK ministers and Big Society Capital) is a flawed plan to marketise the third sector.

2. The Big Society Capital position – social investment is a new way of investing positive social change within a market system

3. The position held by many leading figures in the UK social enterprise movement – social investment is a vehicle for profitable social enterprises to scale up and compete with the private sector.

Bizarrely (or perhaps not) the two positions at opposite ends of the political argument – 1 & 2 – are actually based on very similar (and entirely correct) readings of what’s happening. The difference is that Senscot think it’s a bad thing and Big Society Capital think it’s a good thing/the reason that their organisation exists.

Senscot discussion paper offers five points of objections to Big Society Capital, which are neatly split between two good points about the lack of demand – at least at the near market levels of return that Big Society Capital have been ordered to generate – from social enterprises and socially enterprising charities, and three points worth of the kind of tedious third sector self-congratulation that (unfortunately) helps many in social enterprise lobby movement down south justify the fact that they’re ignoring points 1 and 2.

As points 2.1 and 2.2 make clear, most social ventures ‘operate in the wake of market failure’ and are disproportionately likely be the kind of business that do a lot of good while just about keeping going. Big Society Capital, due to the terms imposed on it by its investors – the government through dormant accounts and the ‘Merlin’ banks – has to make investments through intermediaries that will enable it to get its money bank with significant interest.

While the growth of social impact bonds – which Big Society Capital is supporting – does offer potential opportunities for larger service delivery charities and social enterprises to benefit from social investment cash without needing repay investments with interest, they’re no use to the smaller hand-to-mouth social ventures that Senscot is talking about.

Point 2.2 claims that:  “When BSC realises too few third sector organisations are willing, or able, to use investment on the terms it offers – it will widen its definition of what it calls the ‘social sector’”  but the next sentence: “CEO Mike (Nick) O’Donohoe asked recently whether a Tesco branch – offering employment in a deprived area – could be considered a social enterprise (unfortunately, he wasn’t joking)” makes clear that everyone knows that process has already begun.

And for many involved with Big Society Capital that was always the intention. Big Society Capital’s chair, Sir Ronald Cohen, has long been a proponent of social investment as an asset class. While social impact bonds – where social ventures get money to achieve social outcomes and investors get a return (or not) based on their successes – are part of that, another part of that is investment in private businesses that offer social returns as well as financial ones.

Unfortunately, Senscot’s alternative vision is based around statements such as: “Do we want a society where everything is for sale or are there certain moral and civic goods that markets don’t honour – and money can’t buy? Many would argue that much third sector activity falls into this category.”

The po-faced moralising aspect of this line is annoying – because it risks closing down the discussion to people who don’t think business is evil – but the bigger problem is that by asserting a fundamental disconnect between the third sector/social enterprise movement and business, these arguments play into the hands of right-wing commentators who say that real businesses make money and the public sector and third sector partners (including social enterprises) spend it.

You can (and I do) agree with Senscot on the fact that very few social enterprises are ever likely to offer lucrative investment opportunities to capital markets without making the leap to say – more or less – that social enterprises are fluffy vehicles for the imparting of goodness that somehow exist outside the money system.

Operating ‘in the wake of market failure’ is not the same as operating outside markets. Money can (and does) buy the combination of products and/or person time needed to deliver social good. The problem is that, when it’s coming from a combination of poor people, grant funders and the state, it usually doesn’t buy them for a price that enables local providers to make a significant profit.

For that reason, Senscot are right that Big Society Capital is not the right vehicle for supporting the activities of most new and existing social ventures in the UK and they’re equally correct to stress the need to look for alternative approaches to support that activity.

They’re less correct to claim that Big Society Capital is (entirely) about “marketising’ social intervention”. All social interventions take place in markets, the difference in the case of Big Society Capital and its vision of social investment is to generate positive social change in markets where there’s significant levels of profit to be made.

I’ve been very critical of them. Partly because I’m yet to hear a case for what they’re trying to do that justifies putting £600 million from dormant accounts into trying to do it and partly because the UK government has promoted Big Society Capital as a vehicle for growing the existing social sectors in a way that is, at best, misleading and, at worst, cynically dishonest. But it’s too soon to say whether this approach to social investment is going to deliver positive change that wouldn’t otherwise have been delivered.

Unfortunately, the people left done up like a kipper by the natural course of events moving forward are those in the UK social enterprise movement who believed that the arrival of Big Society Capital would herald the emergence of social investment market that would prove they were right all along about there being loads of social enterprises that would become really big businesses if only they got some investment. As both Senscot and Big Society Capital – despite their differing agendas – understand, that’s not how it’s going to work out.



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7 responses to “Invested interests

  1. jeffmowatt

    I rarely read what Laurence writes, though I often agree with it, because, like the social finance lobby, there is no way offered to engage.

    Perhaps we’re a part of the social enterprise support sector in that over the lat 8 years we’ve invested in researching an publishing two papers whic address the issue of funding social enterprise. An investment to us, of around half a million if we consider deferred income and costs for an international initiative. In both cases , with a focus on funding the grass roots organisation.
    We’ve been making the case for social impact investment since 1996 and engaging directly since 1999 in Russia . As we point out none of our income is shielded from taxation. Could Sir Ronald Cohen say the same: .

    From our viewpoint the impact investors are the fluffy ones, our challenging organised crime is pretty scary, but not as scary as the challenge to their own authenticity.

    Here’s the essence of the second plan, from October 2006, which we later published in a magazine to protect our IP from predators. It comes from one who actually made as great an investment that any human can afford.
    “Project funding should be placed as a social-benefit fund under oversight of an independent board of directors, particularly including representatives from grassroots level Ukraine citizens action groups, networks, and human rights leaders.

    This program provides for near-term social relief for Ukraine’s neediest citizens, most particularly children who normally have least possible influence and no public voice. Over a few years time, the net cost financially is zero. Every component is designed to become financially solvent, through mechanisms of cost-savings and shared revenue with other components. One component, Internet, provides essential communications infrastructure as well as a cash surplus to be used to offset any lingering costs of other components such as childcare, and otherwise goes to a permanent social benefit fund under oversight of the aforementioned independent, citizens-based non-government board of directors.

    Any number of other social enterprises can be created. Furthermore, any number of existing for-profit enterprises are entirely free to contribute any percentage of profits they wish to increase the proposed initial $1.5 billion social investment fund. If for example the total fund comes to $3 billion, that amount would generate at least $300 million per year in a hryvnia deposit accounts at any one of several major Ukrainian banks, to provide ongoing funding to continue to create and expand social enterprises.

    This strategy places adequate funding for social benefit under control and management independent of government and the very obvious vicissitudes and conflicts inherent therein.

    This is a long-term permanently sustainable program, the basis for “people-centered” economic development. Core focus is always on people and their needs, with neediest people having first priority – as contrasted with the eternal chase for financial profit and numbers where people, social benefit, and human well-being are often and routinely overlooked or ignored altogether. This is in keeping with the fundamental objectives of Marshall Plan: policy aimed at hunger, poverty, desperation and chaos. This is a bottom-up approach, starting with Ukraine’s poorest and most desperate citizens, rather than a “top-down” approach that might not ever benefit them. They cannot wait, particularly children. Impedance by anyone or any group of people constitutes precisely what the original Marshall Plan was dedicated to opposing. Those who suffer most, and those in greatest need, must be helped first — not secondarily, along the way or by the way. ”


  2. A little history. If you’ve been watching similar developments in the United States, their Social Investment Fund (SIF) had a more rapid development

    In November 2008. Social Edge reported that “candidate Obama promised to create a Social Entrepreneurship Agency within the Corporation for National and Community Service. He proposed $3.5 billion a year for social investment, paid for by ending the war in Iraq and eliminating corporate tax loopholes.”.

    As you may see from the strategy paper, I’ve introduced argued for the sum then being spent in Iraq each week to create a social investment fund It’s something Doonesbury also tunes into when Muhammad Yunus publishes his book on ‘Creating a World Without Poverty’

    When delivered the SIF had been whittled down to $100m and made available in substantial tranches to non profit foundations only. From the article about BSC in The Guardian today, I glean that the same approach is to be deployed, albeit under the banner of social finance intermediaries, which if they fund ‘social entrepreneurs;’ as suggested, are not focussed on delivering new self-sustaining organisations, but the approach adopted previously by the Labour government from the US model.

    Rather than putting the funding decisions in the hands of an “independent, citizens-based non-government board of directors.” It is being reasoned that a cluster of social finance intermediaries is less risky than one. Nobody however has ever justified the need for s social finance intermediary. Whereas the the alternate bottom up development approach has been reasoned in considerable detail. That there should be more than one of them suggests only risk mitigation in case of another A4E.

    What’s been argued by those who’ve delivered no proof of concept from their pilots and no strategy plan to justify their reasoning is that for profit intermediaries are the only solution. Those who have no plan want social enterprise to be investment ready.

    Interestingly, as a discovered only today, they’ve not seen things the same way in Northern Ireland, where a Social Investment Fund where each of nine development zones will have “a steering group with up to 14 members from the business, political, statutory and voluntary and community sectors ” .


  3. Thanks for linking your blog post to Senscot`s discussion paper on social investment. My sense is that you are more comfortable than myself with the way market values are crowding out non market norms – in almost every aspect of life. I don`t agree that ‘all social interventions take place in markets’; the majority occur between families, friends, neighbours, communities – society`s core operating system.

    The para in Senscot`s paper which you call ‘po-faced moralising’ – is a straight lift from the last para in Michael Sandal`s recent book ‘What Money Can`t Buy’, He argues that society needs to decide – if there are certain human and civil functions which need protection from markets. Which, of course, is the core of what this debate is about – you and I just happen to disagree. Your blog endures and provokes.

    Best wishes,



    • Laurence, a quote which may be aligned with your own values:

      “We can actually engineer, very precisely and intentionally, a social system whereby human beings are not disposable, and then go about setting forward our social machinery with this requirement built-in as a part of our “social software”, as it were. Or, we can decide not to do it. Either way, a decision is made as to the fate of those who would be dispossessed, unwanted, and in the way.”

      Not Michael Sandel, but from our 1996 paper which critiques traditional capitalism with an ethical argument for a business which displaces shareholder primacy.

      The core argument is that money imagined into existence as debt, disenfranchises real human beings to the point of threatening their existence. It advocates economics which can be measured and calibrated in human terms.

      It’s a message that many do not want to hear with some going to extremes to censor it from any social investment dialogue,


  4. Pingback: Social investment – Is Northern Ireland different? « Economics for Humanity

  5. Beanbags admin

    Hi Laurence,
    Thanks for your comment. What I think is ‘po-faced’ about points 2.3, 2.4, 2.5 in the Senscot paper is the idea that the third sector, by virtue of its social mission, stands apart from (or above) the battle for resources.
    And that private sector values necessarily involve ignoring social responsibilities.

    There are lots of things that money can’t buy but what I mean by ‘social interventions’ are social goods that money (or other limited resources) can buy. Big Society Capital and Senscot’s idea for a Scottish Community Bank are different approaches to supporting those social interventions.

    As always, there’s lots more to say on this.


    • I see a problem with any approach based on the Charity Bank. It’s the problem I related to Baroness Thornton when I wrote in 2005. Investment demands the recipient adopts a charitable status, whereas we are a business for social purpose.

      “Having originally made the decision that representing ourselves as a Social Enterprise rather than a charity was an important definition, People-Centered Economic development was incorporated as a UK company limited by guarantee. We were in fact advised on this by the then Chairman of ICOF who subsequently turned down our application for loan funding without comment on the proposal.

      The difficulty is this: Funding sources serve 3 general categories of organisation – a) The bona-fide cooperative, b) the charitable sector and c) Venture capitalists anticipating some share of profit. Our conclusion therefore is that what we see as Social Enterprise cannot attract seed funding without accepting one of the above operational paradigms.”

      We’d seen the need for unaligned funding in 2004, when the suggestion was to focus investment on CDFIs using the cooperative legal form of a Bencom.

      It’s disappointing to observe that even in Scotland the social enterprise support sector wants to disregard the work of pioneering practitioners.


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