Poised for impact

Anyone who’s dipped into the exciting selection of recently published reports on the growing social investment market in the UK will know that – contrary to the rhetoric – should you find yourself pitching for some of this cash, the second last thing you need to be thinking about is your social impact, and the very last thing you need to be thinking about is your ability to demonstrate that impact.

As the Big Lottery-backed report noted Investment Readiness in the UK noted: “Investees appear to think that their ability to create social impact will be more significant to investors than seems to be the case on the evidence of those who have received investment. This perception amongst potential investees appears to weaken as they get closer towards securing finance.

This is partly because there’s currently significant conflation of the connected but potentially divergent concepts of ‘social investment’ and ‘impact investment’. If the two concepts were going to be discussed separately, the term ‘social investment’ would mean investment in social organisations – the Big Lottery report uses the acronym VCSE meaning Voluntary, Community and Social Enterprise – while the term ‘impact investment’ would mean investment that requires the investee to demonstrate specific social outcomes as part of the deal.

This is a neat separation. Unfortunately, it doesn’t work because – to give two examples – while the authors of Investment Readiness in the UKuse the term ‘social investment’ to refer to any form of finance offered to social organisations with the expectation that there will be a financial repayment” that view is not shared by social investment wholesale finance institution, Big Society Capital, who say: “Social investment is the provision and use of capital to generate social as well as financial returns. Social investors weigh the social and financial returns they expect from an investment in different ways. They will often accept lower financial returns in order to generate greater social impact.

This may seem like semantics but – based on the comment from NCVO’s Head of Research Karl Wilding on this post – it was actually the difference, in 2011, between a minimum of £2.9Billion loaned to voluntary groups (primarily from High Street banks) with the expectation of being repayed and £165million in specified ‘social investments’ from ‘social investors’.

If, at this point, you’ve managed to continue reading without banging your head repeatedly against your desk as your confusion becomes increasingly tinged with despair, it might be helpful to move on, accepting that as a minimum everyone accepts that ‘social investment’ – whatever else it means – means investment where either or both parties to the deal has some social motivation for their participation in it.

What’s clear is that even in the specialist field of social investment by specified social investors, there isn’t necessarily any need for investees to demonstrate social impact. The new £25million fund managed by Nesta subsidiary, Nesta Investment Management, is different. The fund has been set up to invest in early stage ventures focused on:

  • the health and wellbeing of an ageing population;
  • the educational attainment and employability of children and young people; and
  • the social and environmental sustainability of communities.

Sensibly, Nesta have mapped out an approach called Standards of evidence to explain how they’ll judge whether the ventures they’re investing in are making a positive impact. The standards range from Level 1 where: “a potential investee can clearly say what a product or service does and why this may have a positive impact on one of our outcomes in a logical, coherent and convincing way” up to Level 5 where: “it is clear that the product or service can be operated by someone else, somewhere else and on a large scale, whilst continuing to have positive and direct impact on the outcome, and whilst remaining a financially viable proposition.

This seems like a useful way of looking at things. The fund will hopefully help to tackle the demand for high risk social investment highlighted by the Big Society Capital-backed report The First Billion but should also make a useful contribution to the debates about how organisations’ social impact can most usefully and meaningfully be measured (whether or not that measurement is specifically linked to an investment).

Like social investment, impact measurement is something that’s constantly talked about but rarely practiced – unless you take the view that it represents some combination of a corporate-inspired rebranding of monitoring and reporting back to funders or doing good PR about your products and services. In recent years it’s seemed that the best-known system for impact measurment, Social Return on Investment (SROI) is, ironically, often used a proxy for people’s wider scepticism about the growing demand for impact measurement in a general sense.

As both social investment/impact investment and impact measurement continue to grow in prominence, the challenge for their proponents is to come up with convincing, evidence-based explanations of what they’re for and – most importantly – what positive social impact they deliver compared to other methods of investment and evaluation.

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6 Comments

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6 responses to “Poised for impact

  1. An interesting piece, David. My question is where are all these social investors that accept a lower rate of financial return in return for higher social impact? As far as I know they are all at a market rate or higher, unless I’ve missed something? Are Big Soc Capital planning to do this?

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  2. Beanbags admin

    Hi Lucy,
    That’s a good question. So far, there isn’t anyone doing that (at least not explicitly).

    Last year, Nick O’Donohoe of Big Society Capital was saying “We’re not interested in grants or soft loans”. I assume that’s still his position.

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  3. Did you see C4 Dispatches – Getting Rich on the NHS tonight?

    I was reminded of two things, first an interview from 2010

    Limiting the financial return of a social business to return on investment (ROI) can help balance the company’s blended focus on profit and mission, says Terry Hallman, CEO of a U.K.-based social business addressing poverty relief and reformed childcare in the former Soviet Union.

    Considering that businesses that issue no shares and therefore distribute no dividends may still offer a financial return, Hallman says he sees ROI as the preferred form of non-dividend financial distribution.

    “When we get into divvying up financial profits it’s too easy to get sidetracked by a myriad of possibilities along those lines,” Hallman tells Axiom News.

    “In that case there is distraction from the primary objective of any given project, the social concerns for people at risk of exclusion, or already excluded, from the opportunity to have a decent, safe, secure life.”

    Hallman adds that if “a lot of emphasis is placed on financial returns, the usual suspects can and will get in, figure out to how strip out the social aspects of social businesses and keep all profits to themselves.”

    “Think of the corporate raiders on the loose in the U.S. in the 1980s. Same thing. That mindset is the driving force that has created such need for social businesses to begin with.”

    The second is the approach I made to Virgin Unite when Sir Richard Branson first showed interest in business which tackles social problems.

    Now I see why they were so unwilling to collaborate.

    Take note in particular of what he says about not being able to find sufficiently scrupulous partners.

    http://economics4humanity.wordpress.com/2012/10/07/the-email-that-changed-capitalism/

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  4. Hi David,
    The tradeoff between financial returns and impact really depends upon the venture, doesn’t it. I wrote a post on a related topic (valuation) http://piqueventures.com/valuing-a-company-part-2-social-impact/, although it is getting at the same root variable of returns.
    I like that Nassim Nicholas Taleb, author of the Black Swan, reminds people that risk cannot be measured. Instead, risk measurement models “[make] a speculative assessment of some future event”. He also gives the example of measuring temperature, but we assess the weather.
    I would say the same is true about impact. We can count and measure some results, but we assess impact.
    Assessing impact will involve analytical, emotional, intuitive, and possibly physical inputs of information as impact is a personal matter (what I find impactful will be influenced by my own experiences and emotion response and will differ from what someone else thinks is impactful). Our decision-making also requires the integration of emotion, intuition, body alongside analysis.
    Striving for impact metrics to help people compare and assess ventures feeds analytical decision-making. In order for impact investment to succeed, make sense, and become pervasive, we need a different kind of investment decision-making – an integrated one. My book is coming out in 2013 on the very topic!
    All the best,
    Bonnie

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    • Bonnie, I know a thing or two about Black Swans. As I child I remember from having family friends in Australia, that some postage stamps from this country bore the image of a black swan, a rarer but nevertheless well know variation of the species.

      The rarity and consequent value of this form should have been understood by residents of the nearby village of Brockwier in Gloucestershire. The two black swans stolen from their village pond, should have been at least considered, if not predictable.

      It was a convenient truth to describe the 2008 crisis as an unpredictable event. Our own monarch asked financiers why nobody saw it coming. Who would admit that they’s been warned and disregarded the advice?

      It was this inherent unsustainabily of the economy, creation of money as debt with no finite anchor, which is the background in 1996 for a ethical argument for a social purpose business, with a paper delivered to US President Bill Clinton.

      http://www.slideshare.net/JeffMowatt/principles-of-people-centeredeconomics

      as you may see, the metric suggested is ‘measured and calibrated in human terms’ and leads on to the argument for community ahead of shareholder primacy.

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  5. Pingback: October 5th, Transition Institute’s Weekly Roundup.

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