Yearly Archives: 2009

Government Policy, Impact Investing, Social Economy

Is a Social Economy Possible?

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If you look to the left (I mean that literally—to the left hand column of the Social Edge homepage) you will see a rather silly photograph of me and the words “A Clearly Social Economy”.  This is meant as a clever play on the name of our business (ClearlySo) and the social economy we all wish to help bring about.  But just because we want desperately for something to happen does not mean it will, and I have a profound weakness for hopeless causes.  My football team (soccer, to you Yanks) has little chance of surviving in the top division and my political party seems to be a perennial third place finisher in a two-horse race.  Is a truly social economy just a pipe dream?

On the investment side, despite all the talk, the flow of funds is just a trickle.  Foundations, with few exceptions, keep talking about social investment but doing little—here the USA is uniquely advantaged because of the requirement to spend at least 5% of fund assets each year (a requirement absent in most other countries), against which “Mission Related Investment” counts.  So that is relatively good, but where else would we applaud entities who dedicate 5% of their assets to their core activity as a success but in social/impact investment?  What about the other 95%!!

SRI funds, although they are growing at a clip, make investments in the same large listed companies as mainstream investors—no hope there, right?

We speak often of the massive tidal wave of wealth that could come from the HNWIs, but the private bankers which guard those assets are conservative to say the least.  Less well-off retail investors, even those inclined to make social investments, are blocked from doing so by securities regulations.

And what of the social entrepreneurs?  Despite all the hype and charisma, where are the big success stories—the social sector equivalents of Google or Facebook?  We cannot blame it on time, as these two businesses are recent hits.  Those which make a big difference and become household names (The Body Shop, Ben & Jerry’s and others in the UK whose names will not be widely recognised) cash in their chips as soon as they achieve scale.  Will there ever be a big social enterprise (apart from Mondragon of Spain, the exception that proves the rule)?

Absent financial success, do we really imagine the funding will continue to flow to unsustainable (though eminently worthy) social enterprises in a fiscally constrained world?

And earlier today, at the Said Business School at Oxford, where I spoke at the Skoll Emerge Conference to high-powered students looking for guidance, a young woman asked me if she should not “clear her debts” and work for an investment bank.  It was not just the money, but she valued the competitive, highly-charged atmosphere.  Could I really pretend that this was available in abundance at firms in the social finance field?  To whom do I owe my loyalty?  To the keen MBA?  To the sector?  To “Truth”?

First published in The Social Edge in November 2009.

Innovation, Social Economy, Social Entrepreneurship

Will The Social Economy be Far More Feminine?

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Last week I participated in a podcast by the Guardian in the UK.  One issue we debated was the idea of a women-run investment bank.  I was highly supportive and put my name forward to sit on its (mixed!) Board.  My thinking—an excess of testosterone and an absence of diversity has nearly destroyed the western economic system—our investment banks need more balance.

These are tricky issues to address in print; one feels on a cliff edge in doing so, but this issue seems important.  There is much research which suggests that women are better equipped at exhibiting balance—at being aware of and acting in accordance with a wide-range of conflicting objectives.  In a financial meltdown caused by a lack of balance, are these not sound arguments for a more feminine approach to the economy—or simply more women in more senior places.

Rwanda, in the aftermath of its 1994 genocide, has since seen women attain many senior positions and the majority in Parliament.  More recently, Iceland was bankrupted by a set of reckless “cowboys”—now women have been given the political and economic reins.  In both cases this was not a planned or decreed handover; the people merely turned to women to sort out their mess (see a ClearlySo blog post on this subject).  Do we need to do the same elsewhere?

In the social economy this has already begun.  Think of some of the prominent figures in social business, enterprise and investment.  Anita Roddick was co-founder, driving spirit and the face of The Body Shop, one of the sector’s first mega-success stories and a business which changed how we think about consumer products.  The co-heads of Justgiving, the leading charitable giving website, are both women (Zarine Kharas and Anne-Marie Huby), and the two leading UK fairtrade brands, Cafe Direct and Divine (chocolate) are run by Anne MacCaig and Sophi Tranchell.  There are some great men as well, but compared to the traditional business sector the extent of this female presence is unique.

Do we need to encourage this further?  If so, how?

Could we be going too far in this direction?  If so, what are the risks?

Although it is a bit weird feeling that history is making my gender somewhat useless—our position is much of our own making.  I look forward with enthusiasm to seeing a more feminine economy, in the social enterprise sector and elsewhere.  We have had our chance!

First published in The Social Edge in October 2009

3D Investing, Impact Investing

Will social investment become an asset class

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This question, as to whether or not Social Investment (SI) will become an asset class, has come up at several recent meetings I attended.  Many of us in the sector are endeavouring to accelerate the development of the sector and each of us individually are considering how to tinker with old models, found new mechanisms and use various combinations of advocacy and cajolery to make something happen.  There has been some progress and the sector is growing, but far slower than we might otherwise desire.

Understandably several of my colleagues believe that if we create SI as a separate asset class it growth will increase.  This thinking seems flawed to me—I do not believe that SI will be a separate asset class, nor do I believe we should desire it to be.  This view stems from a view regarding what SI actually is, and what it is not.

I see SI as being comprised of all investments which are made for reasons beyond their risk-adjusted rate of financial return; where these extra-financial returns have a social, ethical or environmental component (let’s call them all “social” for the purpose of this article).  Presently this includes microfinance investments, Cleantech VC investments, Socially Responsible Investment (SRI) funds and a variety of thematic funds—such as those into water-related businesses.  At present which asset classes do these sit in?  Microfinance is now a growing part of the fixed income area, Cleantech VC would be part of the VC allocation in the alternative investment asset class, while the last two would be part of the very large equity asset class.  In fact, Robeco and Booz Allen believe that such Responsible or Social investments will account for 15-20% of the worldwide equity assets—reaching an enormous figure of $27 trillion in 2015.

Four different types of SI—three different asset classes.  What would happen if all these were to be combined into a single SI asset class?  I suspect that drawing these investment areas away from the mainstream would be to the detriment of their growth.  Within asset managers the “asset class” of SI would require many different disciplines and expertises to be duplicated within one asset class—this would hardly be optimal.  Also, any new asset class would start small, certainly below 5%, as do most new asset classes within investment organisations—until it had proven itself.  This would be well below the sorts of figures expected in the Robeco/Booz study.  SI’s growth in fixed income, apart from microfinance, has been more recent, but it would also be limited if it were spun out into its own category.  As a general rule we need to avoid being shunted off into a backwater.

Social Investment is instead becoming a key feature of the investment mainstream.  As with risk in the 1970s and 1980s, investor’s understanding of risk, and appreciation of its consequences, grew to the point where all portfolios took it into account.  Social returns are now being increasingly understood by market participants and, in particular, their end-investors (pensioners or mutual fund shareholders).  Thus they are being considered as part of a growing number of all investment decisions.

SI is not an asset class.  Let’s not make it into one and instead make SI part of a growing percentage of a very large total investment “pie”.

First Published in Third Sector in October 2009.

3D Investing, Innovation, Institutional Investors

What is wrong with the Investment Industry?

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A recent post which appeared on both Social Edge and ClearlySo infuriated my friends and colleagues from the Socially Responsible Investment (SRI) sector.  I suggested that they might actually be responsible for stifling the growth of impact investment.  By vacuuming up most ethically-motivated investment and building portfolios of the same old big-cap listed stocks, they hardly assist the impact investment cause—despite their name, how “social” are they?  Dutch bank Robeco and Booz Allen estimated this pool will be EU5 trillion by 2015 worldwide, as the responsible investment sector continues to grow at twice the rate of the industry, illustrating investor preferences for more than just financial return.  Why is there a shortage of products which provide genuine social impact as well as financial returns?

Charities and foundations have billions in their coffers; endowments which fund their good works.  In the USA they are obliged to spend at least 5% per annum of these annually on their mission, of which “mission-related investment” is included.  Elsewhere there are no such restrictions and, with limited exceptions, the money is invested in all the conventional financial assets, in pursuit of return-maximisation (a crash or two notwithstanding).  This is absurd; name another sector where at most 5% of assets go to the organisations’ chief objective.  If this were the corporate sector, heads would have rolled long ago.

Pension funds are similarly “conservative”, or traditional.  Even those with sympathetic constituencies put themselves into a similar “straitjacket”.  They argue their fiduciary responsibilities give them no choice.  This is hogwash.  Many of the bolder and more genuinely responsive and responsible organisations (such as TIAA-CREF in the USA or the Esmee Fairbairn Foundation in the UK and others) find they can undertake steps to address this absurdity by allocating assets to impact investment—it is time for others to follow.

Not only is the conservatism of today’s trustees probably contrary to their beneficiaries’ desires (who would, in many cases, trade off some financial return for social impact, if the question were properly put) but really rankle staff, who also have social motivations.

Shall we require investment firms to survey staff regarding these tradeoffs, the same way mandatory surveys check risk tolerances?

Should Government mandate a minimum impact investment threshold, well above the current 5% level?

Should consumer-protection agencies require that investment products marketed as “ethical” or “responsible” or “social” meet certain minimum standards, in the same way we require say chocolate manufacturers use a certain amount of cocoa?

First published in The Social Edge in September 2009.

Impact Investing

Converting the “Middlemen”

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Normally I work hard to avoid gender-specific terms in articles, especially in titles.  But middlemen has a clear meaning—and we know what these middlemen do, don’t we?  Especially in financial services, particularly in the UK, they play a key role in distributing investment products to final investors, who might be either retail, institutional or High Net Worth.  Without converting them to ethical investment we will get nowhere.

Today a tragic circumstance exists.  Investors say they want responsible investment products, but they are way ahead of their advisors whose knowledge of this area is limited.  These middlemen, which include the IFAs, private banks, and other wealth managers, are lagging partly due to ignorance but also due to time.  The array of ethical products is still limited, confidence in them builds slowly and financial firms are loathe to stick their necks out.  It’s a shame this prudence has come so late—but that is a story for another day!

What is needed is a three pronged conversion assault.  First, we as a sector need to speak out on this issue and raise awareness.  If we make the argument in a positive way it will be most effective.  For example, when we talk about the growing desire of investors to invest ethically, we make the argument that firms which fail to offer such products will be missing out on a money-making opportunity.  I confidently predict that social investment (or whatever you wish to call it) will grow far faster than other investment worldwide.  Not everyone might agree with this but occupying this stronger ground, is preferable than lecturing people on what they “should” be doing.

The second prong involves government.  Existing mechanisms implicitly favour mainstream investment.  They simply choose to ignore the fact that many investors want BOTH a social and financial return, in favour of the arrogant presumption that returns maximisation is everything.  Many surveys prove this not to be the case.  We need to the government to require financial firms to run “ethical checks” on their clients in the same way they oblige firms to assess risk tolerance.  Ethical and social risk matter a great deal to investors—why are investors permitted to neglect these needs.

Finally, investors need to hassle their professional advisers.  If we ask, the products will come.  Coutts Bank is a case in point.  It was not too sure of its policy on social investment until its client base, especially those who have made their own money, demanded these products.  Now it is seeking to leap to the forefront.

With this three-pronged approach, and the growth of ethical players such as Investing for Good, ClearlySo (I am its CEO), Marmanie Consulting and a host of IFAs who are members of the Ethical Investment Association, I am certain we can achieve mass conversion.

First Published in Third Sector in September 2009.

Government Policy, High Impact Businesses, Institutional Investors, Social Entrepreneurship

Do we really need more money?

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Ask any entrepreneur, social or otherwise, and the answer is always an emphatic “yes”.

As CEO of ClearlySo, an early stage social business, I am among those lining up with my hand eternally outstretched—in search of funding.  We are all keen to get our hands on more capital, convinced this will solve all our problems.

We seek it everywhere and demand governments “do more” for the sector.  When Barack Obama recently requested $50 million for a Social Innovation Fund, I queried the amount, suggesting it was trivial.  After all, in Britain the government has invested hundreds of millions of pounds into social enterprise and is currently considering at least another £300 million to support a Social Investment Wholesale Bank.

But the question arises—is all this government money a good thing? In a recent blog post, I challenged that notion and pointed out that the social business sector, especially in the UK, was in danger of being flooded by too much government funding.  Does this not crowd out private investment?  Are the criteria for decision-making apolitical, or are they heavily influenced by partisan calculations or “cronyism”?  In such times of burgeoning fiscal debt and individual hardship is such government largesse appropriate?

There is a more fundamental question.  Are we focusing too much attention on the supply of investment to the sector?  Funds for investment can be organised quickly—overnight if you’re Bill Gates.  But to build a successful business can take at least 5 to 10 years.  By focusing excessively on the investment side are we not missing an opportunity to invest more into building great businesses?  Won’t this imbalance harm the earliest investors, who will realise poor financial returns as too much capital will be chasing too few good deals?  Won’t the longer term future of Impact Investment suffer as a consequence?

I understand the importance of bringing more capital into the sector.  But we must ask ourselves what is the best use of incremental funding at this time—more investment or building more great businesses?  The companies need professional non-executives, sound financial control, well-conceived marketing and sales strategies, etc.  Demands for more funding have become an act of faith for practitioners in the sector.  Is this serving our long-term interests?

First published in The Social Edge in August 2009.

Angel Investors, High Impact Businesses, Social Entrepreneurship

The Charismatic Entrepreneur—A Blessing or a Curse?

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In the early stages of any entrepreneurial venture, social or otherwise, it is the energy and drive of the single entrepreneur (or sometimes a duo, a la Google) which keeps the “show on the road”.  Her (or his) passion, drive, connections, persuasive powers etc. are what enable the venture to get through the impossibly difficult early days.

In social entrepreneurship this is even more the case.  As there is often no equity upside, the financial incentive is essentially non-existent.  Moreover, the social nature of the organisation gives the enterprise the element of a “crusade”.  In this regard the CEO/Founder’s vision is the lifeblood of the enterprise—the source of strength on which others often draw.

Yet frequently this strength becomes a source of weakness, especially as the organisation matures.  So impassioned is the leader by the mission, so violently consumed by this personal passion, they stifle innovation, debate, staff development and, inevitably, the enterprise’s future.  Such dysfunctionality is often the rule, in the dozens of social enterprises I have observed over the past decade.  For example:

  • The success of one consumer-oriented social enterprise is deeply threatened by a CEO who seems unable to yield control; threatening the company’s development and its access to capital.
  • A technology oriented social business failed partly due to the CEO’s need for control and his/her refusal listen to staff, advisors and shareholders.
  • An environmental firm loses key staff on a regular basis because the CEO is unwilling to be challenged.

…sadly, I could go on and on.

It is not always thus.  I sit on the Board of a company, where the CEO/Founder, an unusually secure individual, regularly raises the issue of succession and team development in order to secure sustainability.

  • How can social enterprises benefit from the drive of the entrepreneur without sacrificing their futures?
  • What role can the Board play in these situations?
  • How can good governance be achieved when there are no external shareholders with power?  This is a serious problem where the CEO retains control in order to “protect the ‘mission’ of the organisation”.  Frequently this power is used to protect his/her position.
  • Can external stakeholders have a role in helping to address and resolve these problematic circumstances?
  • How can credit be shared in a world where success is often personalised by the media?

First published in The Social Edge in July 2009.

Impact Investing

Addressing the Supply and Demand Imbalance in Social Entrepreneurship

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Many of us aspire to bring about a “Social Economy”, where BOTH the financial and social returns on investment are considered and we seek to do so as fast as possible.  Assuming that we had the resources to do so (like the UK Government once did!), the question still needs to be asked, what to do?

Much of the focus of UK Government policy seems to have been to use cash to foster and develop social enterprises and social entrepreneurship generally.  Money has been allocated to all sorts of bodies, some charities, and even some which are now privately held companies.  Bridges, NESTA, Unltd, Futurebuilders, The Adventure Capital Fund and a host of others have been recipients of taxpayer funds to accelerate the process.

It is simply impossible to judge whether or not this effort has accelerated the development of the sector—I suspect such a study will never be undertaken.  This is not to imply a reluctance to find out.  Key civil service personnel with whom I have met have a genuine interest in the question—and my own belief is that they sincerely wish to “get it right”, but one simply cannot know what would have happened otherwise, how much private capital has stayed on the sidelines as a result, or felt encouraged to get involved?  We can also never know how many businesses were enticed into starting up as a result of the increased capital available.

We do, however, know a few things.  First, it takes much longer to build a successful business or enterprise than to set up a fund.  Second, that the lack of available, sizable and commercially viable firms does discourage social investment (this recently confirmed by my conversations with many buy-side thought leaders).  And third, that much less has been invested in creating companies than in getting funds off the ground.

I was therefore very encouraged by a meeting convened by NESTA to look at the issue of “investor readiness” (IR, or in laymen’s terms, getting businesses ready to secure investment).  This is not merely about writing a beautiful business plan, which money can easily solve, but making sure the team managing the business is solid and that the plan not only looks nice but is sensible and based upon sound assumptions, etc.  This sort of work takes time and is a highly professional skill—drawing on years of experience.  Also, IR professionals need to know how to “pitch” the new business and whom to approach for capital.  This latter challenge of course has been made easier by the funding mentioned above.  IR is a key building block (but only one block) in the process of building a great firm.

Assembled at the NESTA meeting were a range of publicly financed and publicly supported firms as well as some private players in the field.  For UK social entrepreneurs looking to secure these services, the range was encouraging.  To someone like me with an interest in the longer term development of the sector there was still a nagging question.  Would the cash coming available for investor readiness actually help the sector?  Or would the incremental assistance squeeze out private sector players forced to compete with a subsidised/free service?  Lastly, would the subsidised/free services match the quality of the private sector providers or exceed it?

First Published in Third Sector in June 2009.

High Impact Businesses, Impact Investing, Institutional Investors

The Good Side of Collapsing Global Capital Markets

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The collapse of global markets has its downside.  You would have to be very callous not to consider the pain suffered by homeowners, pensioners and savers.  I also fear the negative consequences will continue for many years—perhaps a generation.  I do not think our political leaders yet fully appreciate this fact.

On aspect of the crisis has been a dramatic retrenchment in terms of international investment.   Banks tend to “bring money home” during a crisis.  This instinct has been further encouraged by political pressure as Government, having spent trillions bailing out the system, is urging banks to support domestic businesses.  The developing world has been badly hit but such a withdrawal of funds, which extends to many investors—not just the banks.

I contend there is a positive side to this—the growth of local funding, or its more colourful derivation, “crowdfunding”.  By local funding, I mean that people invest in things they know or feel comfortable with—and where better to start than with their local enterprises?  The Ebbsfleet United football club was a celebrated beneficiary of this when they were rescued by the “crowd” of fans (hence the name) to the tune of £600k.  During times of great uncertainty, I contend people will favour those businesses whom they know—where they can literally “kick the tires”.  At ClearlySo we imagine this sort of funding will be a high-growth area—this has already begun.

One County Council has approached us to work with them on a “local investment initiative”—as the concern grows over bank lending.  We are also working on a project for the HCT Group, which runs community transport primarily in London and Yorkshire (we disclose this with their permission), to explore methods of broadening funding sources.  Historically they have been funded by lease finance (backed by the busses).  If it were able to tap into local community sources of finance, this could lower its costs and provide a tangible way for the people it serves to take part in the prosperity they help to create.  Watch this space—we will see a great deal of activity here in years to come!

First published in Social Enterprise Magazine in May 2009.

High Impact Businesses, Impact Investing, Innovation, Institutional Investors, Social Economy

Partnering with Business…or Supping with the Devil?

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Last November I wrote about a UK social enterprise called the Bright Ideas Trust which secured partnerships with Bank of America, The Prince’s Trust and a host of others.   These firms provide financial support (critically), credibility and a range of other services.

Technology forms such as Microsoft and Salesforce.com actively assist charities and social entrepreneurs, with free products.  Sure, it may be in their selfish interest to “hook” these firms on their products, but in the process, don’t social entrepreneurs gain access to valuable resources?

When we at ClearlySo work with professional service vendors to develop products for our social business clients, this is another way of “partnering” with businesses, and each party is considered to gain something from the exchange.

Normally the above are all considered “appropriate” business partnerships.

But in Bangladesh, Grameen struck a “dream partnership” with Norwegian phone company Telenor, to roll out a highly successful joint venture.  The deal has turned sour.  What went wrong with this business “partnership”?  Do partners turn nasty when the fruits of cooperation are great?  Not very “social”, is it?

Telecoms firms are active all over the developing world, often working with local partners.  Is this exploitation or cooperation, and what factors will help determine which it will be?  Can social entrepreneurs do anything to ensure fairness?

Are certain specific firms simply out of bounds for social enterprises?  When The Body Shop sold out to L’Oreal (part-owned by Nestle) observers reacted with rage.  “A step too far for an “ethical” company”.  Its one thing for Ben & Jerry’s to be purchased by Unilever, but Nestle…

What about other sectors?  Defence contractors?  Tobacco manufacturers?  Or banks—today’s bete noire?   Are some industry groups just beyond the pale?  Can any self-respecting social enterprise engage in a partnership with these?

What about energy companies—should social enterprises not engage with the well-regarded Shell Foundation because of some of the historically unpopular activities of its parent?  If BSkyB (Rupert Murdoch’s business in the UK) is a leader in certain aspects of working with social business—how should we view this, cynically or positively?

Partnerships with business, are they worth it or too problematic?

First Published in The Social Edge in May 2009.