SOCIAL INVESTMENT AND INVESTOR APPETITE

22 August 2011

An interesting report was recently released by the social business consultancy ClearlySo, looking at “investor perspectives on social enterprise financing”. This is an important topic in social investment, as there are often quite bold claims made about the mainstream potential of social or impact investing (JP Morgan’s “$1 trillion market” springs to mind here…), but not much evidence about the actual appetite of mainstream investors for this kind of opportunity.
 
There has been some analysis recently on this issue (eg by NESTA), but what is interesting about the ClearlySo report is its particular focus on the attitudes of institutional investors (pension and investment funds etc). Whilst getting individuals thinking about social investment is important, if there is to be a real step-change in the size of the market, it is these institutional investors that need to be convinced.
 

POSITIVE FINDINGS?

It is hard to know whether the findings of the research are positive or not. On the one hand they confirm the fact that there is a great deal of interest in the idea of social investment, particularly among private bankers and wealth advisers who are seeing demand from their clients for advice on this topic. This is encouraging.

On the other hand, the report finds that those in charge of institutional funds are only really interested in making social investments if they can be kept within fairly low risk thresholds and deliver close to market rate returns.

Whilst this is understandable, as these people have a duty towards their investors (perhaps pension holders such as you or I), it presents a difficult challenge. There are not many current social investment propositions that can realistically expect to deliver market-rate financial returns, and even fewer that can hope to do so whilst maintaining a low risk profile. Many of the organisations in the market are relatively new, and while they may have credible projections for their future social and financial value, they do not yet have a concrete track record of delivering returns.

LACK OF CLEAR MEASUREMENT

There is a bit of a chicken-and-egg feel to this problem, as institutional investors are unwilling to get involved in market with little track record, but this track record can only be developed if there is sufficient investment, including from institutions. In the short term, as the report suggests, this probably requires some hard work from social businesses and social investment intermediaries to identify fund managers who are prepared to be more adventurous, and work with them to develop a track record of successful social investments.

One concern raised by the fund managers interviewed, which we should pay attention to, is the lack of clear measurements of social impact. This is not a new problem: it is highlighted as an issue in pretty much every discussion of social investment or social enterprise. However, it might prove to be particularly important for institutional investors. While individual social investors or special purpose funds would probably ideally like there to be well-developed methods of measuring social return, until this is the case it is still possible for them to work with investee organisations to design and implement agreed systems of measurement.  It may be labour and capital intensive, but it is at least possible.

APPROPRIATE MEASURES OF SOCIAL RETURN

However, this is not really feasible for an institutional investor. In order for a fund manager to justify any reduction of financial return by reference to social return (as they may have to) they need to be able to quantify this social return as well. And if an appropriate measure does not exist, they do not really have the option of “rolling up their shirtsleeves” and working with CSOs to develop one.

They are not venture philanthropists, and have neither the time, inclination or skill set to do this. Hence developing appropriate measures of social return, even if they are perhaps sector-specific, is going to be crucial.