Practitioners like us in the social finance sector spend a significant part of time explaining to business which generate social impact the advantages of securing capital from social investors. We argue that they are the sort of investors who are more willing to take a long term and client-centred view. Furthermore, because they are positively motivated by the social impacts generated, they have greater alignment with the goals of socially-oriented enterprises than conventional investors, which can lead to many tangible and intangible benefits.
The fact that social impact investors value these non-financial outcomes is what underpins social finance. In conventional finance, investors seek to maximise risk-adjusted rates of return over an increasingly short time horizon. Increasing “short-termism” and the obsession with profit and return maximisation at all costs has been seen by many to be the underlying cause of the financial crisis. Social investors value social impact and are keen to support the businesses which generate this.
This unsurprisingly resonates with many enterprises generating social impact. Their reason for being is not about profit maximisation, but driven by a set of social objectives combined with a need for sustainability. Thus businesses oriented towards impact, often described as social enterprises, share their ethos with emerging social impact investors. They also express distaste for the ethics of conventional finance, and a frustration with banks and their short- term behaviour.
Thus it has caught us by surprise recently when a number of successful social enterprises balked or hesitated at financing possibilities from social investors when mainstream banks seemed to offer slightly better rates than social investors. Suddenly quaint concepts like “values-alignment” were quickly jettisoned in the pursuit of the lower interest rates; even from the “evil high street banks”.
There can be times when social investors are more financially attractive to social enterprise borrowers than banks—as they value the social impact and make an implicit or explicit trade of risk-adjusted return for social benefit. Some recent ethical bond issues would fit into that category, such as the well-publicised Scope bond. Socially-oriented businesses like the Ethical Property Company (EPC) make it very clear that equity investors are very unlikely to do as well, from a purely financial perspective, purchasing EPC shares than buying stocks in conventional property companies. EPC shareholders explicitly trade off returns for the important social impacts generated.
But there is not always such a funding advantage. Sometimes banks offer very attractive terms. Housing Associations, even the most ethically oriented of the lot, find the current glut of very cheap bank debt hard to turn down. Other large socially oriented enterprises we know also find it tempting. But we would urge them to try to resist temptation (unless the gap is ridiculous).
As we have seen over the last few years banks do literally come and go. Even those which have not gone under will enter and exit lending markets at speed. SMEs up and down the country have learned that “relationship banking” was more of a slogan than a genuine approach—at least for most commercial banks.
To build a new financial market means supporting investors who take a long term, values-oriented and client centred view. This might be necessary even when there is some short term cost to be paid.
First Published in Third Sector in April 2014.