Tag Archives: Third Sector

Perfect as the Enemy of the Good

As the CEO of ClearlySo I get invited to join committees to “foster impact investment”, or such-like.  These committees are normally chock full of well-intentioned, intelligent and experienced professionals and are invariably interesting.  Inevitably, one of the recommendations always seems to be to collectively ask the Government to “do more”, which usually means funds, grants, or tax credits, or some series of goodies from the Treasury.

There is no doubt that the funding provided by successive governments has helped enable the impact investment sector here to become the most diverse, innovative and developed in the world.  But enough is enough.  In fiscally constrained times it feels indecent to ask for more.  ClearlySo has routinely opposed impact investment tax credits in particular, because they generally benefit wealthy investors, which feels inappropriate.

But the tax system is a very powerful policy tool, so recently at one of these committees I did make a recommendation to utilise this tool in a fiscally neutral fashion to encourage more positive impact, and simultaneously discourage negative impact.  It is what I call “fiscal tilting”, and I have been writing about it for years.  Its premise is this: tax things we want less of and shift those revenues (or a portion thereof) to things we want.  As the Meerkat says, “simples”.

Organisations creating negative externalities (e.g. pollution) would have to pay, and the funds would be recycled to entities generating positive externalities, creating a new source of income for charities and high-impact enterprises that are currently doing their good work “for free”.

In fact, such a change would probably be revenue-positive as government would need to spend less because charities and others would do more, and firms would generate less mess for taxpayers to clean up.  Capital markets would respond to these policy changes and amplify the effects by further penalising firms which did bad things and favouring those doing good.

Whilst some were supportive, other colleagues seemed nervous.  “What exactly would you tax?”  “Who would decide how it was spent?”  The truth is that I had no idea, but figuring out what we want more or less of, as a society, does not seem beyond the realm of human intelligence.

I do not know how such a system would work perfectly, but our current tax system is a shamble.  Surely an experiment is worthwhile—I feared that a search for the excellent was threatening the good.  On reflection, I think it may be that or worse.  My sense is that radical change is threatening.  We operate in existing systems and normally they work especially well for people like me on such committees.  We will fight hard for a bigger slice of the pie, but question how it is baked or if we should be having pie at all and there is deep unease.

Simple ideas (e.g. the “Tobin” tax, a basic income) are derided as overly simplistic.  The proposers are overwhelmed with objections and inundated with technicalities.  In my view, let’s first decide if an idea has merit and then, if we believe it might, try it out in a small way (as Finland is doing with the latter).  The fact that things as they are work poorly means our downside risk is limited.

However, this is not how things work, so in the spirit of moving things along, let me offer a specific (and very rough) proposal.

  • We manufacture far too much stuff and the strain on our natural resources is irrefutably unsustainable. So, let us tax physical “stuff” by weight.  I would only exempt residential homes and food as well.
  • Let’s raise £1 billion. Any less, it’s not worth the bother.  The tax you pay is the weight of stuff you sell, divided by the amount of stuff bought in the economy, times £1 billion.
  • The money is used to help eliminate homelessness and provide those without homes with food and shelter.
  • If it works, the Government announces that more of this is coming

Naïve?  Absolutely.

Unrefined?  Definitely.

Arbitrary?  Without a doubt—feel free to improve upon it.

Simples.

This post was first published on Third Sector.

Starting New Markets: What Counts as Success and the Possible Sale of Big Society Capital

In mid-April, it was announced that Australia’s Macquarie Bank had acquired the Green Investment Bank (GIB) in the UK for £2.3 billion.  The GIB was launched in the UK, under the Conservative-Liberal Democrat coalition in 2012, to facilitate a marketplace for renewable energy investment in the UK. It was an initiative designed to fill a state funding gap for tackling climate change by attracting private funds to finance investments related to environmental protection and improvement.

Following the announcement, there was some concern in the marketplace that the new owner would asset-strip the GIB and that their intentions were far from the more noble aspirations of the Coalition Government.  Historically Macquarie has not been noted for its green credentials.  Only time will tell.

The UK has an honourable history in developing government-backed initiatives to kick-start markets considered important for a variety of reasons.  The listed venture capital firm, 3i, was originally started as the Industrial and Commercial Finance Corporation (ICFC) in 1945 to provide badly needed long-term funding in the post-war environment.  The concept was to foster the development of a market for entrepreneurial businesses in the UK and it became the first, and, for many years, the dominant VC firm in the UK market.  Its original stakes were owned by the major UK banks as well as the Bank of England and after a merger and several re-branding exercises, it floated in 1994.  After the business was listed all the banks gradually sold off their stakes.

The Commonwealth (formerly Colonial) Development Corporation (now CDC) was also begun by government initiative.  It was founded in 1948 by the Atlee Government with the mission of fostering business development in the former British Empire, starting with agriculture.  It has gone through many iterations, re-brandings and restructurings over the years, but like 3i and the GIB, it has a core mission which is not, and was not meant to be, solely about profit maximisation.

Big Society Capital (BSC) was another in a series of such UK initiatives.  Commencing in 2012, it was funded by the commercial banks (£200m), and received an initial allocation of £400m from unclaimed assets in the “dormant accounts” of UK banks.  It may invest the £600m subject to certain criteria, but I would argue its overriding mission is to build the impact investment market in the UK, which governments of all stripes have considered to be in the best interests of the UK.  In my view* it has been the most significant development in the UK impact investment market.

Some time ago, in a public meeting, I asked the then new Minister for Civil Society, Rob Wilson MP, if he expected to consider BSC becoming wholly privately-owned given that the GIB was in the process of being sold off, and also whether the new May administration was less committed to impact investment.  His reply was not altogether clear, but observers should note that there is form for UK governments to get excited about some new concept or initiative, establish a vehicle to finance it, support it and then sell it.  This is all part of impact investing (and early stage investing, and renewables investing and investing in developing markets) becoming part of the mainstream—a trend which all of us at ClearlySo strongly support.

To me, it’s not a development to moan about or feel sad about, but part of a process of moving markets onward, in a way that benefits society.  Were BSC to become wholly privately-owned (and I have no reason to think this is imminent or even planned) it would be an event which would mark a new stage in impact becoming closer to the mainstream—a next step in an unfolding process.

And just as a footnote, it is interesting that BSC’s first CEO has just been appointed CEO of CDC!

 

*In the interest of transparency, please note that BSC has an equity investment in ClearlySo of circa 9% and also has some £600k+ of debt outstanding to the company.

This article was first published on Third Sector.

The ethics of running a charity or impact enterprise

Of all the things that bothered me about Tony Blair, and there were many, the one that probably  worried me the most was the extent to which his actions often seem to follow from a deep-seated view that if he did something it was almost by definition right. The thinking seemed to go something like this: “I am a good guy and therefore if I feel something is good and the right thing to do, it is by definition the right thing to do”.

Normally I refrain from blatantly political points in this column but I think Blair is a well-known example of the sort of behaviour pattern we sometimes observe. Strong conviction is a very funny thing. We admire people who possess it, and it is vital in the work we all do in impact investing, but we recognise that when individuals or groups of people have too much of it, there can be serious consequences. Terrorism is the worst and most extreme example of this.

I must confess that I sometimes observe some of this behaviour in charities or high-impact enterprises.  Let me be clear about what I mean: I have seen actions by charities and impact-driven businesses that, in my judgement, did not adhere to appropriate ethical standards. My reaction to this was sometimes dismay but I have also been downright shocked. On these occasions, I came across a rationale which is like the Blairite one described above. The fact that the aim of these organisations is to enhance society and achieve some positive social, ethical or environmental impact somehow obviates the need for behaviour which is consistent with good governance, proper behaviour and even in some cases the law.

For obvious reasons, I’m not going to go into specific examples. However, I’ve encountered cases where organisations simply choose not to pay bills, or manipulate accounts, or mistreat staff or a wide variety of other actions which, to be frank, I have rarely observed in the private sector. And I used to work for Lehman Brothers!!

Please understand that I’m not suggesting this is widespread or common, and most of the organisations that we work closely with at ClearlySo show a high degree of integrity in the work they do. But I think that because of the sector’s use of the words “social” or “impact” to describe what we do, we must hold ourselves to a higher standard when it comes to ethical behaviour.  The impact of not doing so affects not only the enterprise involved but also casts a shadow over us all. Consider the scandal which emerged last year around charities and their fundraising behaviour towards the elderly which was uncovered in the media, or the widely-reported problems at Kids Company.

Sometimes I do think the higher level of scrutiny, and the higher standards to which charities and high-impact enterprises are subject seem unfair, but that is the world we live in. For example, Baroness Hogg was recently demoted at the Bank of England for failing to appropriately disclose on a timely basis her brother’s role at Barclays. Mark Carney, The Governor of the Bank of England, made it clear that a “one strike you’re out” policy for such “honest but serious mistakes” was not going to apply to all financial institutions, but suggested that considering MPs’ reactions and the Bank’s position, this action had been taken.  We find other organisations being held to high standards because of their ethical or impact orientation—like the Church, for example.

Organisations must not feel their “higher purpose” gives them license to behave without regard to standards.  If they do, it damages themselves and the entire sector.  And an array of audiences is watching carefully and judging.

This blog first appeared in Third Sector on 29/03/2017. 

The benefits of collaboration in impact investment

I recently had the opportunity to give a workshop presentation at the annual SEIF congress in Zurich, Switzerland. SEIF is an outstanding Swiss organisation that helps to develop high-impact enterprises in the Swiss, German and Austrian market and is also building an impact angel network. We at ClearlySo have had the pleasure of working with it cooperatively over many years.

It is therefore not surprising that I was asked to speak about “bringing together different partners to create new models in impact investment”. It felt rather daunting, and I sometimes think that actors in impact investment spend far more time talking about the benefits of cooperation than practising it. However, as it developed, it seemed to me that there were many different types of cooperative or collaborative endeavours and that each worked differently in supporting innovation in impact investment.

The first example I gave I described as “client collaboration”. As observers know, ClearlySo launched ClearlySo ATLAS in December 2016. This is a tool focused on private equity and venture capital fund managers, and it assesses the impact of their conventional private equity investments. The spark for this idea was a conversation with Octopus Investments four to five years ago, which continued as we designed ClearlySo ATLAS. As this was a new product in a new market, we decided to work with the PE/VC community in developing it. In a sense, the end-buyers played a significant role in constructing what they would later buy. ClearlySo coordinated all of this, but the cooperation of client prospects was essential.

Second, I spoke of “partnership collaboration” in the case of the Big Venture Challenge. This was a programme funded by the Big Lottery Fund and managed by UnLtd Ventures. After the first pilot of the programme, UnLtd wanted to improve its effectiveness and contacted three partners: the Shaftesbury Partnership, the Social Investment Business and ClearlySo. Each had a specific role to play and was allotted a share of the programme budget. Our role was to help the more than 100 high-impact ventures to secure external investment, which was matched by grants from the BVC. Securing impact investment is what ClearlySo does, so UnLtd gained access to this expertise at a reasonable price and we delivered our objectives with a combination of existing and new resources.

Finally, the third type of collaboration I would describe as “competitive collaboration” and is a key feature of nearly all impact-investment deals, although I used the landmark HCT quasi-equity transaction as an example. In such deals, each party seeks, as best it can, to get what it wants. HCT is looking for low-cost finance, the end investors (in this case led by Bridges Ventures) are looking for a high return, and we are looking to complete the transaction and secure a fee. If each party pushes too hard, the deal falls through and everybody loses. Everyone needs to work together while pushing for their own interests to get the best possible deal. Such competitive – or even antagonistic – collaboration is the essence of all investment transactions.

In conclusion, collaboration is essential to pushing the frontiers in impact investment, but there are different types of collaboration, and each might be more or less appropriate in different circumstances. In collaboration, there has to be a successful outcome for all – there can be no winner take all, or things speedily unravel, which some of you may know as the “prisoner’s dilemma”.

This blog was first published here for Third Sector on 01/02/2017.

Does profit with purpose offer something unique?

I have been involved in the area of impact investment since 1999, and during that time there have always been passionate debates about philosophy, politics and money. One of the most recent of these is the debate over the “profit-with-purpose” business and its growing relevance.

For the uninitiated, PWP companies operate like normal businesses, except, crucially, they are values driven. This can be a function of a “mission-lock”, statements a company’s constitutional document, or its more informal mission statement – something that means the business is not just about profit-maximisation. Various bodies have differing views regarding how firm and explicit such statements need to be, but they are distinct from the regulated “social enterprises” which, for example, receive favourable tax treatment under Social Investment Tax Relief.

I am not sure exactly why PWP businesses are suddenly in fashion, but I have several theories. First, I think the pool of capital available for investing in organisations which are destined to deliver sub-market returns is limited. This constrains the growth of impact investment overall. In the US far more deals are transacted and these are in the PWP space. There is also the growth of BCorps – private companies that meet social, transparency and accountability standards – globally, which is very American in its origins and this mentality is spreading. Big Society Capital’s investment criteria are partly set by its founding Act of Parliament, which restricts its capacity to back intermediaries that support PWP businesses. I sense BSC straining against these limitations, which threaten to hamper one of its key goals: the overall growth of impact investment in the UK.

In the interest of transparency, I should note that ClearlySo and its predecessor, Catalyst, have supported PWP businesses since 1999 and have never seen much point in arbitrary restrictions – for example, a maximum permitted dividend pay-out ratio – as the arbiter of what is and is not impact investment.

But opposition to the drift into PWP businesses has some sound philosophical bases. There is a deep-seated fear that the “values of the market” will encroach on the more values-driven impact investment world and change its nature. This view has been well-articulated by commentators such as Dan Gregory and David Floyd. The three-dimensional investment world that ClearlySo regularly advocates – where investors consider risk, return and impact – is still different from the existing mainstream where only risk and return matter. If we lose that difference, the movement for values-driven investing has lost.

I think the debate is also about money. Traditional third sector organisations, especially charities and the more tightly-controlled social enterprises, fear that PWP businesses will crowd them out in terms of investment. This is especially true with regard to the £600m which is under the control of BSC. The third sector sees that money as very much theirs – seeing any encroachment by PWP firms as a threat. I see their point – to see this BSC pot seep away into what are perceived as more mainstream businesses feels threatening.

While I can understand their position, on balance I support the expansion of PWPs. Despite some market values creeping in to impact investing, I believe that the only way to address the scale of social problems we confront is by encouraging mainstream capital into impact investing; seeing the investment world from the 3D perspective mentioned above. Many new innovative models will be supported and tremendous social, ethical and environmental impact will be generated. Traditional charities may indeed lose some of the BSC-backed investment that would have been headed their way, but the £600m, even when combined with matched funding, was never going to be enough to offset the effect of austerity.

This blog was first posted on Third Sector on 28/10/16.

The next step in payment by results

Whatever one thinks about social impact bonds, the payment-by-results mechanisms they have helped to facilitate have massively transformed our approach to public service commissioning. There is still much potential ahead for utilising these tools. They are almost impossible to find fault with, if done properly, as it is outcomes, rather than inputs, that matter to voters.

Public debate centres on spending in priority areas, such as health and education, because we believe that spending and outcomes are positively correlated. If we could have exactly the same outcomes in a way that is cheaper, thereby requiring less taxation, who could possibly object? In the ridiculous case that root beer was found to cure dementia, few would suggest we find a costlier route to demonstrate the seriousness with how we feel about dementia. The money saved could be spent on other priorities or permit lower taxation or debt repayment.

The beauty of such schemes is that everyone seems to win. Society is better off, by virtue of the societal intervention, but the taxpayer also wins because money is saved by the public purse, as only effective interventions are rewarded. In this way, ineffective methodologies are weeded out and those with better ideas, skills, or both, will replace incompetent, expensive and inefficient providers. Politicians also win because scarce resources are diverted towards achieving outcomes citizens desire, which in theory should lead to happier voters—a good thing for vote-seeking politicians.

Bureaucrats and politicians in all parties, in my opinion, have been far too cautious, perhaps irresponsibly so, in the pace with which such PbR schemes have been implemented. They tend, for example, in many of the SIB structures, to cap investor returns or share out only a portion of the savings. Why not be more generous and encourage far greater investment? There is also bureaucratic resistance to the new and a preoccupation with precise monitoring, which can be very costly to implement—on many occasions, this undermines the process and creates deadweight loss. Might there not be opportunities for considering less costly and maybe somewhat less rigorous oversight? I sometimes feel our search for the perfect is undermining the good.

The area that worries me the most is where measurement is hard or even impossible and where there is no direct spending that is reduced, but societal need is great. HCT, for example, is involved in projects that assist disabled young people to use public transport. There can be cost savings in that local authorities are thereby freed of the responsibility to have these young people driven, but what if there were no cost savings to be achieved? Would not the sense of self-actualisation and independence these youngsters achieve because of this training be worth the investment? Would not society be better off, even if there were no financial savings to the Treasury?

I am certainly not arguing that programmes, which save the Exchequer funding, should not continue. Far from it, they should be accelerated. In these cases, society’s improvement is bettered directly, through the impact and outcome, and indirectly through cost savings, which can presumably achieve impact elsewhere. However, the focus on such areas alone is suboptimal. I recognise that our national accounts mind-set makes this a challenge, but many have developed more all-encompassing metrics and some countries, such as Bhutan or Costa Rica, already use them in policy implementation. Also, just because something is hard to measure, does not mean we should not try to do so, especially where the welfare of the nation is at stake.

The article first appeared in Third Sector on 28/09/16.

Is the government downgrading impact investment?

On face value, the decision to move the Office for Civil Society from the Cabinet Office and into the Department for Culture, Media and Sport is a bit puzzling. Which bit includes us? Are we part of culture, media, or sport? It is hard to say but, in this regard, government is similar to the corporate sector. Things and people have to report to somebody, somewhere and cannot expect what they do to be in the title of the division. Secondly, Karen Bradley, the new Culture Secretary, might turn out to be terrific. At this point, one simply has no way to judge.

From what I have read, the charity and social enterprise sectors are in uproar. about the move. I suppose some of the consternation stems from the fact that we were very much the darling of government, and now feel, well, a bit jilted. Three successive governments (Labour, the coalition and the Conservatives under David Cameron) devoted a great deal of attention to the third sector and impact investment.

For Cameron, this was one of the centrepieces of his big society programme and seen as a critical path in delivering positive social outcomes in fiscally constrained times. Our sector has been subsequently subsidised, championed and the subject of unrelenting ministerial love. This was capped off in making our area a centrepiece of the recent G8 summit in London a few years ago. The global social impact investment task force sprung out of this and its work continues.

But this highlights the risk of too close an alignment to any political party or individual. When they are replaced, as is inevitable, the factors that brought the sector into favour will work in reverse. What is clear is that the new Prime Minister, Theresa May, is establishing her own legacy and those programmes that are seen as ideologically close to her predecessor might be in jeopardy.

What many fear is that the largesse that has been lavished upon the sector will cease. I do not speak here of the charitable sector, which is potentially facing a serious crisis and in which I have very limited expertise, but the impact investment sector.

For the impact investment sector, I have some reservations, which I have expressed publicly, about the extent of subsidy we receive and its distortive implications. In a number of programmes, I observed it driving behaviour and not facilitating it — an important difference. I have also been a long-standing critic of tax credits for impact investment, believing them inappropriate at a time of severe fiscal constraint, especially as they predominantly benefit the wealthy.

I do, however, see a silver lining for the sector; one which stems from my deep-seated belief that impact investment and the values-driven enterprises it supports stand on their own merits. High-impact enterprises can benefit from lower cost of labour and capital, higher prices for their products and high visibility. They generate substantial positive externalities which governments, one way or the other, are going to need to pay for, and increasingly will pay for as commissioning shifts to outcomes-based systems. Investors, corporations, and consumers value the positive impacts these enterprises generate and this is increasingly being incorporated into their investment and purchasing decisions. Maybe now impact investment and social innovation will flourish, not as a pampered child but as a great idea whose time has come.

First published in Third Sector on Tuesday 23rd August 2016.

Problems for impact investment in Sweden

Over the last few years at ClearlySo we have been travelling regularly to continental Europe as part of what we do. We have done business on the continent, and have also used these trips to learn about new innovations in impact investment (such as SIINCs from Germany and “90/10 funds” from France) and to identify financial institutions with a developing interest in impact investment. We believe that accessing new pools of capital is of great benefit to our entrepreneurial and impact fund clients looking for investment.

Sweden as a country seemed promising. It is liberal (small “L”), progressive and open to new ways of thinking. In addition, the positive and non-adversarial relationships between business, finance and the government have made Sweden a role model to which other countries aspire. One recent development in this regard is the introduction of a six-hour workday throughout Sweden. This is intended to make Swedes happier, but in a particularly Swedish twist, experts there also believe it will make Sweden more productive. It is already one of the most productive in Europe:  in 2014, per capita GDP was $45,143, significantly higher than the UK ($39,136). This is despite the fact that people in the UK worked 4% more hours each year.

Given such an open-minded, progressive approach, I felt confident that impact investment would be surging in Sweden. Sadly this appears not to be the case, based upon conversations I’ve had with experts. There seem to be few high impact entrepreneurs, at best one or two impact investment funds, very little government involvement and near zero involvement from the mainstream financial sector (although this is true of the UK mainstream as well).

This surprised me. However according to the experts I met, while Swedes are intellectually open to new ideas, they are actually relatively conservative (small “C”) in terms of implementing them. Swedish society already works rather well, and there is a reluctance to tamper. People earn high incomes, income disparity is well below UK/US levels, and taxes are higher, but the public expects and receives much higher quality social services than other European countries. This is in fact part of the problem for impact investment in Sweden: although Swedes cite all sorts of social problems, in fact, the Swedish social compact operates relatively well.

There are also two deep-seated beliefs I encountered which act against impact investing or even philanthropy. First, there is genuine suspicion of mixing the profit motive with social outcomes. I would not describe it as closed-mindedness, but just a wariness of this very Anglo-Saxon idea. This is then amplified by a particularly Swedish aversion to charitable giving. According to the Charities Aid Foundation (2012) Swedes gave 0.16% of GDP to charity. This compares with 0.54% in the UK and 1.44% in the USA. It is in Sweden where we see the clearest distinction between the Anglo-Saxon model of earning/giving and its model of using taxation to fund social welfare expenditure.

Such an environment is not particularly fertile soil for high-impact enterprises or impact investment in general. In fact, along my European journeys, I found that troubled economies were more hospitable to the necessary innovations (maybe out of desperation). In 2007 I journeyed to 10 Balkan countries and found flourishing innovations in places like Serbia and Bosnia as individuals grappled with deeply troubled societies in the aftermath of a brutal civil war.

I know very few Europeans who would trade places with Sweden as a successful economic model. On a recent trip to Stockholm, any slight disappointment I felt in Sweden’s current approach to impact investing was overwhelmed by the beautiful weather, celebrations of Walpurgis Night, May Day and the 70th birthday of King Carl Gustav. Stockholm is very close to paradise on earth. Nevertheless, this is not to say that Sweden is a lost cause from an impact investment perspective – the banks do, for example, raise money for overseas projects (most notably through microfinance). Once Sweden has considered the model and made it relevant to their domestic needs, I have no doubt that impact investment will eventually flourish in Sweden.

Impact investment and the environment….strange bedfellows, why?

Recently ClearlySo has seen a flurry of environmentally related deals. A couple of weeks ago we helped the firm Upside Energy to close an investment round of £545k. Upside Energy creates a Virtual Energy Store™ by aggregating unused energy from devices owned by households and small business sites that inherently store energy, to sell balancing services to grid operators which helps reduce the need to turn on the older, most polluting and expensive power stations during peak demand times More recently we supported the fundraising of a company called Switchee.  Switchee’s product reduces energy usage which saves tenants in affordable housing money on their utility bills, and the data helps social landlords better manage damp, maintenance and repairs in their properties, thereby fighting fuel poverty. These two transactions, previous deals closed and several in the pipeline have coincided with Earth Day, which took place on 22 April. Earth Day is often credited for launching the modern environmental movement. My ClearlySo colleague Lindsay Smart has written an extensive blog piece in honour of Earth Day.

This juxtaposition of events comes at a very interesting time in the UK impact investment space. For reasons that are hard to explain, and even if I could would lie well beyond the word limit of this column, the “mainstream” UK impact investment community and environmental investment community has always remained separate and aloof from one another. For us at ClearlySo this is rather bizarre. Many of our investor clients seem to care a great deal about environmental matters. These include water pollution, air pollution, global warming, sustainable fishing and forestry and a host of other related issues, which impact all of us. Also, matters environmental have always had a disproportionately negative social impact on the world’s poorest—so the social and environmental impact spheres are closely linked. To say this isn’t really part of the impact investment movement is not only odd but self-defeating, particularly as this represents a considerable portion of available investment opportunities. Moreover, the metrics for understanding environmental impacts are more highly developed, better understood and more widely utilised at the present time. It seems rather arbitrary to push the environment to the impact investment side-lines. Our view has been that if investors value particular impacts, so do we.

Some of this may be institutional in nature. Environmentally conscious investing came onto the scene prior to what we now describe as impact investing and perhaps there was little interest in embracing this new movement. Similarly the Green Investment Bank was launched well before Big Society Capital, which was the impact investment sector’s broadly equivalent institution.  Thus a central government initiated split of sorts may have been created. The apparent assault by this Conservative Government on many aspects of renewable energy funding, in contrast to its persistent praise of impact investment has also furthered this divide.

Nevertheless, we will continue to argue that these two activities are part of a much bigger single picture. It is reminiscent of what we always saw as flawed thinking, that impact investment is an asset class, perhaps cleantech investment is another and maybe micro-finance and social housing are a third and fourth. In our view those are merely different facets of a world where impact is becoming important in all investing.  We see the world shifting from investing in a two-dimensional way, where only risk and return are measured and considered, to a world we have long advocated of 3-D or three-dimensional investment. It is bringing impact to all investment that is our true mission.

SIINCs are SIBs 2.0……and likely to be far more successful

At ClearlySo we have never been very enamoured of SIBs. They have always seemed an expensive and labour-intensive instrument, and not of good value to our clients, which is the fundamental test.

On the other hand they have been very intensively supported by government and leading players in the impact investment space. To some extent this proves the point about their lack of fundamental appeal. Surely an innovation so intensively supported would have progressed much more rapidly by this point.

This in no way undermines the monumental contribution they have made to how we think about the possibilities in impact investment. One breakthrough of SIBs, much to the credit of their creator, Social Finance, is that they secured payment by governments to investors based on social impacts achieved. This was an amazing accomplishment.

Fundamentally the problem that needs addressing is one of externalities. When enterprises generate high social impact as a by-product of what they do, society benefits. These benefits could be in the form of governmental expenditure which will no longer be necessary or things we simply enjoy for free, such as clean drinking water. The challenge has been how to capture the benefits of those positive externalities.

SIBs are a complicated way of achieving this, because they require a set of agreements between commissioners, investors, providers, impact verifiers and potentially others along the way. Securing agreement by so many parties is difficult and time-consuming.  There are also fees at several levels. We have consistently argued for using the tax code to “tilt” in favour of enterprises generating positive social externalities as a more efficient mechanism. Such arguments have hitherto fallen on deaf ears.

Social Impact Incentives (SIINCs) are a positive innovation and a logical next step beyond SIBs. Originated by Roots of Impact, a German organisation, SIINCs have been developed in cooperation with the Swiss Agency for Development & Cooperation with a test on high impact enterprises in Latin America. In simple terms, a direct payment is made by an organisation such as a foundation or development agency (“outcomes payer”) to an organisation generating social impact. The need for an independent verifier of outcomes/impact on customers/beneficiaries remains but this is the only necessary complexity. Roots of Impact argue in a recent paper that the SIINC model is highly flexible and adaptable and doesn’t require any agreement except from the outcome payer and the enterprise. The payment increases the revenues of the enterprise and therefore the profitability of the enterprise is enhanced.  Even an agreement with the investor may therefore prove unnecessary, and in any event can be quite a separate/unlinked discussion.

The brilliance of the SIINC model is that it facilitates payments by those who care about positive externalities directly to the enterprise thereby changing their business model. This is a simple, straightforward bilateral agreement, which addresses the inherent complexity of SIBs. The added cost for an independent verifier of impact should be more than offset by the cost savings achieved to governments, for example. As more positive externalities are captured this way capital markets will adapt to the new (payments-enhanced) business models of these high impact enterprises.

SIINCs are a brilliant innovation, a next step in the thinking prompted by SIBs and I congratulate Bjoern Struwer, Christina Moehrle and Rory Tews (all from Roots of Impact) in conceiving this innovation.

My only concern is that as a non-Anglo-Saxon innovation it will fail to get the attention it deserves.