Category Archives: Impact Investing

Why “impact enterprises” outperform

Last week I had the pleasure and privilege of attending the annual social impact review of the HCT Group. HCT has been a client of ClearlySo for quite some time. In fact we met the company about a decade ago, so readers are welcome to take my comments with a pinch of salt.

This annual review has become a key date in the impact enterprise equivalent of the summer calendar. Dai Powell, the chief executive of HCT, discussed trends and how they are increasing the impact of their operations. HCT, as many readers already know, is a charity, but is also considered one of the UK’s largest impact enterprises.

The event was punctuated with glowing references to the various enterprises that provided products on the night. The venue was the St Luke’s Community Centre and the beer was Toast Ale. The highlight of the event was a funny video about someone with disabilities who had gone through independent transport training ans was now able to travel on buses and trains alone. Another video featured HCT chairman Sir Vince Cable, who was appointed leader of the Liberal Democrats on the very same day as the presentation. This video was not as funny, although I suppose that depends on one’s sense of humour.

What struck me during the meeting was the realisation that this company has been enjoying rapid growth at a time when the UK bus market has been in relative stagnation. I’m sure there are many factors behind HCT’s success, but I think there is one factor in particular we can’t ignore: values are “in”.

Observers who dwell on the limitations of enterprises with a social, environmental and/or ethical impact overlook the advantages of being an impactful organisation, especially these days. More and more, people want to work for organisations with values, people want to purchase from organisations with values, people want to invest in organisations with values and, luckily for HCT, local authority commissioners really want to purchase from organisations with values.

This point really was driven home (pun not intended) to me when one of the guests who presented at the event was a commissioner for the three boroughs of Kensington & Chelsea, Hammersmith & Fulham and Westminster. He spoke about how great HCT was and how excited they were about the contract they had recently signed. I suspect the Grenfell Tower disaster happened well after this contract was agreed, but now it’s hard to imagine any other outcome. Up and down the country commissioners are increasingly asking themselves questions such as “does this provider have the best interests of our community in mind, or its firm’s profitability and its personal bonus pool?”

For this reason, among others, HCT has grown at a compound rate of 12 per cent in revenues since 2009 in comparison with a relatively flat UK bus market. Other organisations we work with have seen similar growth and, in many cases, it is the social value provided that is winning the contracts. I believe there will be a lot more of this going forward as more and more commissioners and consumers get on board (sorry again).

This blog was originally published on Third Sector on 26 July 2017.

In Praise of Angels: how angel investors are shaping impact investing

I love angels. A 2011 CBS News survey found that 77% of American citizens believe in the existence of angels. And whilst I was born in the United States, these are not the angels I’m praising in this blog! I’m referring to a group of high net worth investors (HNWIs) who invest in the early stage impact-oriented deals that we support.

From the very start of ClearlySo, angels have played an immensely vital role in our company’s development. In 2010, we began by doing “Social Investment Speed Dating” in which 8 to 10 angels met 8 to 10 potential investees.  Believe it or not, these speed dates resulted in numerous transactions.

In 2012, we brought structure to this network and launched a small tightly-managed and very engaged group of investors called ClearlySo Angels who sit at the centre of our much larger Individual Investor Network. These two networks formed the backbone of our business in the early days and remain vitally important to us for identifying the future stars of the impact investment sector. Angel investors also provided much of the capital which has enabled our firm to survive.  We have over 40 angel investors at present and are always looking for great angels to join our growing base of supporters.

Long before a meaningful institutional investment impact investment marketplace formed, angel investors in the UK where the only game in town. Frankly, an institutional market is only still starting to form.

So, what makes angel investors so great? First, they can do what they want. They do not operate through committees, subcommittees, task forces, departments and all the fabric that is required of large financial institutions. Angels can act on impulse – they can do as they please and can do it quickly. Angel investors also have a substantial amount of money, particularly when they act as a group.  At ClearlySo, we currently have over 700 angel investors in our networks, and this means we can galvanise a significant amount of capital for early growth impact businesses.

Angel investors typically possess skills, expertise and experience which have helped make them wealthy in the first place (especially those who have made rather than inherited their wealth). When they get involved in young companies, they significantly enhance the human capital of the business and the social capital via the contacts and networks they possess.

Therefore, angel investors are a critical part of the UK ecosystem for growing important high-impact businesses, which can deliver great returns and change the world in the process. A good example is the story of Justgiving, which was recently highlighted in a blog post by my colleague Mike Mompi.  Since the formal launch of our networks in 2012 we have assisted 95 early stage impact businesses to raise more than £44m of capital. Many of these growth companies have also gained nationwide recognition – nowhere has this been more celebrated and more obvious than the UKBAA’s recent Angel Investment Awards ceremony, which took place on 6th July 2017.

Several of my colleagues from ClearlySo attended this dinner and we invited several our investor and investee clients to join us.  In the run-up to the ceremony we were aware that six of our previous clients were up for awards which made the evening particularly exciting for us. We were delighted that four of ClearlySo’s former and current clients – 3 impact businesses and 1 impact angel investor:

Bulb Energy won Scale Up Team of the Year.

Fair Finance won Best Social Impact Investment.

Powervault won Best Angel-Crowdfunding Investment.

Meganne Houghton-Berry won Angel Investor of the Year.

(You can find a full list of the other winners here.)

These awards have been going for twelve years, but the special category for impact has only been in place for five years (ClearlySo clients have won the award four times out of those five!).  This signifies how recently impact entered the mainstream.

Apart from the shameless bragging on my part, I think there are a few important points to make about the significance of this event. First, is the rising importance of angel investment in the early stage ecosystem in the UK as exemplified by the growing popularity and influence of the UKBAA and of HNWIs generally. Secondly, it’s fascinating to us that in just five years organisations and individuals linked to impact have seen their share of the awards grow from one token award in 2012 to 3 awards into 2017. I believe in the next 10 to 20 years it will be considered weird for a business not to have some impact story. Perhaps by that point there will be no need for impact categories and we will recognise that all firms deliver impact.

This is really the essence of our thinking at ClearlySo. It also formed the core concept around which ClearlySo ATLAS was developed. ClearlySo ATLAS is our recently launched product which expertly and efficiently assesses the impact of all investees of private equity and venture capital fund managers. Angels have led the way in impact investing, and I believe that PE/VC firms will be right behind them. Both Angels and PE/VC firms have significant and influential stakes in their investees, and as they start to care about impact, the world will see change.

While UK financial regulations mean that we are not yet permitted to market to mainstream retail investors, we hope that will change and look forward to the day when all individuals will become impact investors. Now more than ever we need them – and lots of them.



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.


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 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.

How to Define Social: Or, the Best Little Whorehouse in Amsterdam


One of the questions I am most frequently asked is how ClearlySo defines what is socially impactful, or not. This is not a question of measuring impact but simply what does and does not count as an organisation which generates social or ethical or environmental impact. I have answered by saying that we define it as other people do.

I do not believe it is our role to define this for others. We are a “taker” in the decision-making process. Our definition of what counts and what does not is heavily determined by the opinions of others (especially investors) and these views are highly subjective.

ClearlySo’s first ever fundraising client is a firm called Belu Water. At the time they marketed themselves as the “carbon neutral bottled water company”. The founding entrepreneur and investors behind it (these included Gordon Roddick and The Big Issue) convinced us that the company generated important social impact and we took on the mandate— this was about 10 years ago.

To some observers the very notion of an ethical bottled water company seems absurd. If you really want what’s best for the environment, they would argue, why not just drink tap water? Belu would respond, and it was a response we agreed with, “that people are going to drink bottled water anyway, so is it not better that they drink our water instead of somebody else’s?” We thought and continue to think there is a lot of merit in this point of view (although others disagree) Belu Water continues to be a respectable firm in the field of ethical consumerism. However, this story underscores the point that what is social or ethical and environmentally impactful to one individual may not apply to another.

We found this also with a Thailand-based enterprise we work with many years ago called Cabbages and Condoms. This was an organisation focused on reducing the spread of sexually transmitted diseases in Thailand. It raised funds through a host of activities and from a campaigning standpoint sought to make condom use and sex funny and thereby more widely accepted in the Thai market. Many more conservative Thais were outraged by this sort of activity whilst others applauded its successful penetration of the market and its clever use of humour. The enterprise won many awards.

The range of enterprises we work with at ClearlySo pretty much spans the entire scope of economic activity in Britain. We work with companies in health, education, transportation, property, technology, consumer goods and many other fields. I used to say that defence is probably the only sector where we were unlikely to have any clients but some years ago wrote a blog piece speculating on what a “social enterprise army” might look like (does anybody know where this piece is—I cannot find it). It was meant as a thought piece, and in that regard felt a very useful exercise. I think the answer to the question of what is and is not social is also heavily determined by the culture in which organisations operate.

For all these reasons I was particularly interested to read about a new fund in the Netherlands which has invested into what is effectively a cooperatively owned prostitution business in the red light district of Amsterdam. reported that the Start Foundation, an organisation operating out of the Netherlands, has taken a stake in four buildings in Amsterdam’s red light district and will rent these out to a new business called My Red Light, which describes itself as “the first sex company in Netherlands and Europe in which sex workers have control”. Some will be appalled by this use of impact investment, whereas others will take the view that this sort of thing happens anyway and better that sex workers are able to look after themselves, have control of their destinies and reap the benefits of their labour instead of those who would exploit them. Certainly within the Dutch context such a business idea seems perfectly reasonable and an appropriate impact investment. Less controversially the Start Foundation has also invested in a shrimp processing plant for workers with mental disabilities and an IT company focused on employing people with autism.

There is no getting around the fact that what is social to one person might be “the root of all evil” to another. Consider, for example, what different groups will think of an investment in a locally owned organic producer of whiskey. We come across such companies all the time and the debates are challenging but also entertaining. This is the tricky domain you enter in impact investment.

The title of this blog is a play on the title of the
hit musical “The Best Little Whorehouse in Texas” that opened on Broadway in 1978.


Are the goalposts starting to shift on corporate tax?

At the end of August, we learned that the EU ordered Apple to pay a record EU13 billion in back taxes, as it determined that deals with the Irish Government allowing the US company to avoid taxes were illegal. This follows on from EU decisions in October to charge both Starbucks and Fiat EU30 million each, which it claimed was payable to the Governments of the Netherlands and Luxembourg, respectively, utilising similar arguments.  Both Apple (unsurprisingly) and the Irish Government were expected to challenge the decision, but it raised the stakes in an ongoing battle over fair taxation.

Interestingly I have not found that anyone is claiming that any of these firms engaged in criminal activity.  It seems to be accepted that all three operated within the law, but the law has been judged to have been unfair, or unfairly applied.  I am certainly no expert on such technical issues, but this struck me as an interesting development—especially given the amounts involved and the high profile nature of these companies.  The EU was stepping in and exercising its authority over national governments to strike deals.  One wonders about the January 2016 deal struck between Google and the UK’s HMRC, wherein Google agreed to a settlement of £130m for past tax liabilities.

In any event, a related news item caught my attention yesterday.  On the front page of yesterday’s Fund Management section of the Financial Times it was reported that Legal & General Investment Management, the Local Authority Pension Fund Forum (representing 71 public pension funds), Royal London Asset Management and Sarasin Partners signed a letter to Eric Schmidt, (the Chairman of Alphabet, Google’s parent company) which raised concerns about the company’s tax arrangements.  What was interesting was that the letter did not challenge the legality of such arrangements or ask if avoidance (which is legal, as opposed to evasion, which is not) was being practised, but if the Chair had “…properly considered the implications for brand value and your license to operate in society”.

This seemed eye-opening to me.  A group of investors was questioning the wisdom of arrangements which, though perfectly legal, might put the company’s “license to operate” at risk.  With a market capitalisation of well over $500 billion, these investors see a great deal at stake in any challenge to this license, and have calculated (without too much sweat, I imagine) that what is at risk greatly exceeds the few billions of taxes that might need to be paid.

Companies involved may see this as an unfair “shifting of the goal posts”, and in one sense it very much is.  What has shifted is the willingness of society to allow large and successful companies to avoid paying the taxes societies deem to be fair.  Where national governments have been reluctant to act, often beholden to powerful international firms, supranational organisations (like the EU) or groups of shareholders are beginning to take action.  They are doing so implicitly at the behest of outraged citizens, perhaps even in part to avoid circumstances where these same citizens wind up taking direct action to vent their rage, for example, by possibly boycotting of the products of companies whose tax policies are deemed overly aggressive.  This would constitute an effective termination of such a firm’s “license to operate”, but one that would be enforced by the power of the marketplace and not via governmental regulation, as is normally the case.

Up until this point we have argued that the increasingly important third dimension to investing (impact, instead of just financial return and risk), which underpinned the development of impact investing, was predominantly a reflection of externalities, where hidden costs or benefits to society bubble up to the surface.   Where companies use completely legal means to avoid paying taxes but free-ride on the economy available to all has not been something we considered as part of this equation previously, and it certainly did not seem on the agenda of investors, whom it was felt implicitly encouraged minimising taxes paid.  It now seems we should, and will.  Times are most definitely changing………

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.