Yearly Archives: 2011

Impact Investing

The problem with the Youth of Today – and a social economy solution

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In our last piece for Third Sector, we wrote about the UK riots this summer.  We suggested that, rather than a strange aberration, they were closely linked with the “spirit of the age”, in the economic opportunism they manifested.  Furthermore, we noted that Britain was not singled out; these were part of a growing worldwide phenomenon and represented widespread dissatisfaction with the ineptitude of western political leaders.

The violence is spreading.  I spent a few days in Italy last week and sat in stunned silence as the TV showed 250,000 people in a violent outburst.  They burned cars; they assaulted police and their vehicles and threw rocks, stones and other missiles at the police and buildings in Rome.  In Bologna, the local office of the Bank of Italy was the scene of an earlier attack a few days before.  Silvio Berlusconi had recently survived another vote of confidence, leaving many Italians in despair.  Given the economic circumstances of this country, and more than a decade of mis-management and worse, is an outburst so shocking?  Related protests took place in New York, London, Berlin and Madrid.  They were generally peaceful—but for how long?

The rioters were mostly young.  The Italian press condemned the protesters; as did much of the UK press this summer, at least initially.  Yet, while one understands the need for public order and have sympathy for innocent victims, we also need to reflect on the circumstances confronting the young in the west today.  Their leaders have bequeathed unto them economies which teeter on the verge of bankruptcy.  After three decades in which my generation (I turn 54 as I write these words!) lived well beyond its means, our youth have been presented with the bill, knowing it will only grow as our unsustainable pensions come due—not to mention the likely health care costs of looking after us in our dotage.  To face all this, and also have little prospect of finding a meaningful job is bound to bring out rage.

These problems are vast and complicated, and not easy to solve.  Nevertheless, at ClearlySo we have recently taken a small step towards getting meaningful jobs for some young people.  In partnership with The Roundhouse Trust, we will hold a one day “Social Jobs Fair” at The Roundhouse, one of London’s premiere concert venues on 12/11/12.  Social enterprises will be able to find full and part-time staff and large corporates can recruit for roles in their “social areas”; such as CSR and community investment.  This enables us to help find human capital for the social sector and fulfils the Roundhouse’s youth outreach objectives.

And ClearlySo is hardly alone.  For example, NACUE, is working hard to engage students from all over the UK in entrepreneurship.  Live UnLtd is a youth initiative of the large UK charity UnLtd.  All these will not solve the problem, but they feel far more productive than constant criticism and confrontation with young people who have legitimate gripes.

Impact Investing, Institutional Investors, Social Economy

Banking and the Social Economy

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Last week it was reported that a rogue trader cost UBS $2 billion as a result of “unauthorised trading”.  One wonders why unauthorised trades which yield a profit are never reported.  Putting this aside, it emerged at a bad time for the sector. Earlier last week Sir John Vickers released a report into UK banking, which called for a strict separation between retail banking and capital markets operations. Vickers is attempting to “ring-fence” the government insured retail banking activities which are of systemic importance, and support them with higher mandatory capital requirements, in an attempt to minimise the risk of another banking crisis, caused by capital markets problems. If Vickers proposals are implemented the cost to UK banks is estimated at £6-£7 billion.

Some bankers squeal at the extent of this pain. Warnings about the disastrous impact on the cost of credit for borrowers, the undermining of UK competitiveness or threats to leave the UK in pursuit of a more welcoming regulatory climate have come in a torrent.  On the other hand, politicians and other pundits have piled into the sector, heaping abuse on its leaders, their greedy and overpaid staff and their irresponsible practices.

What relevance does this have to the world of social enterprise and the social economy? Plenty. There is not sufficient money available in government grants or foundation endowments to support social enterprises to the extent necessary. Thus the banking system and the clients they represent are of vital importance to the creation of a social economy.  Yet there is distrust and anger. Some sector colleagues view the financial sector as inherently evil, which ought not to be touched with a barge pole.  But such thinking is short-sighted. Mainstream financial firms have a great deal to offer social enterprises in terms of capital, access and expertise.  On the other hand one cannot deny the damage done by the banks during the recent crisis.  Our sector must have some answers.  Disengagement is a bad answer—what are the good ones?

  • The emergence of social banks. Firms like VanCity (Canada), the Coop (UK) and Triodos (Netherlands) are emerging as competitors.  What are their competitive advantages?  Should social enterprises feel obliged to bank with them?
  • “Crowdfunding” offers an alternative to financial institutions in general. Is this disintermediation healthy?  Should consumer protection rules be waived to facilitate this?

But we also need to have a more articulate critique of the banking sector.  What would we really suggest be done to minimise risks going forward?

  • Is tougher regulation the best answer? I am not sure—Regulators seem forever five years behind the banks.
  • Should we push the banks to lend more? Too much borrowing is what put us in this mess—can more lending really be the answer?
  • Is boosting capital requirements the best answer? Does this not raise the cost of borrowing and reduce the supply of loans?

Our narrative of complaint is not consistent.  We need to develop one.

First published in The Social Edge in September 2009

Impact Investing, Social Economy

After the looting, what we require is a social economy

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At ClearlySo we talk a lot about the ‘social economy’. We prefer the term for its breadth, incorporating as it does social business, enterprise and investment, as well as the entire commercial chain and how it operates. We exist to accelerate the growth of the social economy as against the predominant mainstream economy. We contend that the lack of a more social economy helps to explain the reasons for the riots in England in August and their underlying nature.

Before proceeding, we need to distinguish between the original outburst of anger after the shooting of Mark Duggan by the police and the other unrest that followed and spread across the country. This article deals only with the latter, where the causes of the looting and destruction seem harder to pin down.

In the days and weeks after these more opportunistic riots, I was struck by what seemed to be almost a conspiracy about the way these were reported and discussed. Rage and condemnation were the order of the day and even in private conversations one was cautioned against being in any way understanding of the rioters’ motivations. “It’s too early for that, Rod,” I was told by a colleague.

Most political leaders, in response to public clamour, called for a crackdown to restore order and have subsequently called for, and the courts have meted out, relatively harsh punishments, with the public’s fervent and overwhelming support.

I understand the fear at work and the need for public order. But if we want to minimise the risk of recurrence, we need to understand what happened, although to understand is neither to excuse nor to apologise for the violence.

In essence, the picture that has emerged is that the riots were acts of economic opportunism. People wanted more stuff and they saw this as a low-risk way to acquire it. Countless interviews suggest a cold calculation of cost and benefit. We can be aghast, if we wish, but before we fix this problem, we must understand it.

Such lawless behaviour has been categorised by the mainstream press as outside the norm. But how much of a departure is it? Have we not created a society, an economy, where the pursuit of personal objectives at all costs is indeed the norm? How different is all this, really, from politicians who fiddle, bankers who misrepresent and media personnel who hack? Rather than a deviation from the mainstream, could one not argue that the looters are the very embodiment of the spirit of the age? Is it so shocking that this has taken place, or have we been rather fortunate that is has not happened before?

Tinkering at the margins will not work as a way to solve this. Radical new ideas are needed. Interventions such as tax rises proposed in the US by Warren Buffett are welcome, but although his intentions are good, the solutions to today’s ills need to go further. And his idea looks highly unlikely in political terms.

In a social economy, the array of goals to which individuals, investors and corporates aspire would be more diverse. The single-minded pursuit of profit at all costs would be replaced by a ‘balanced scorecard’ against which decisions would be made.

Governments would accelerate the trend in this direction by punishing negative externalities and rewarding positive ones.

A pipe dream? Perhaps. But so was the fall of the Berlin Wall and so many other events that we thought could never happen.

First Published in Third Sector in September 2011.

Government Policy, Impact Investing, Innovation, Social Economy

Rupert Murdoch, the Arab Spring and the Social Economy

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Headlines in the UK have been dominated by one item these past few weeks—the “phone hacking” and related scandals which led to the closure the longstanding “News of the World” tabloid newspaper and its impact on the wider media empire run by Rupert Murdoch.  UK Politicians, hitherto too frightened to challenge the power of this media mogul are rising up to call Murdoch and his lieutenants to account and the concentration of voices in the media is being seriously questioned for the first time in years.  It is not too dramatic to suggest that democratic forces in Britain are re-awakening from their slumber.

How similar this feels to the Arab Spring, where the forces of democracy rose up against those who ruled to demand that the national rather than the personal interest is paramount.  One by one, dictators are being toppled and new political and economic models are being developed.

Interestingly, abusive practices in the UK and across the Arab world were tolerated for years, as many were victimised by the powerful.  But the dominoes fell when two individuals, who embodied the very spirit of the innocent victim, brought us to our senses.  In Tunisia, it was the self-immolation of Mohamed Bouazizi, the desperate fruit-seller, whose act brought down the Tunisian regime and others which followed.   In the UK it was only when we learned that the News of the World hacked into the mobile phone of Milly Dowler, a kidnapped young girl, that our outrage gave us all the strength to challenge the seemingly unassailable Murdoch empire.

Our economy has tolerated such abuse for too long—where the societal interest is subverted in the interest of personal privilege.  Consider the scene in Italy amid widespread allegations of abuse by of another media mogul, tycoon and Prime Minister Silvio Berlusconi, of having legislated in his financial interest rather than the national interest.

These stories are only the most flagrant violations of social interest in the name of the personal—there are hundreds of others.  They may reflect the most grotesque examples of how the greed of the few has been satisfied at the expense of the many, but they are very much the “spirit of the age”—the age where profit maximisation and personal private interest came to be deified.

The Social Economy (which is how I describe the world where social businesses, enterprises and investment become the norm) is a very different model.  Although far from perfect, and many in it actors are themselves flawed (as are we all), as a model it demands that BOTH social as well as financial interests are considered.  Profits may be optimised, but not maximised.  The risks of abuse hopefully thereby lessened.

  • Is such a Social Economy a mere pipe dream or an emergent reality?
  • What can be done within government to accelerate such a change?
  • Blah
  • Blah

We live in hope!

First published in The Social Edge in July 2011

3D Investing, Impact Investing, Social Economy

3D Investing: The shape of things to come in institutional investment

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Recently, we at ClearlySo had the privilege to conduct and publish research on behalf of The City of London Corporation, City Bridge Trust and the Big Lottery Fund on “Investor Perspectives on Social Enterprise Financing”.   (The link to the full report is accessible from our homepage).  Written by Katie Hill, this 178 page report provides a comprehensive insight into City thinking on social enterprise investment.  Katie interviewed about 60 professionals as part of the work and concluded:

  • There is no silver bullet, but a number of small developments, when taken together, will improve the level of social investment.
  • There is no “City” as such; the term describes a broad array of financial institutions, pension fund managers, private equity investors, etc. Each have different needs, objectives and approaches and need to be separately understood rather than amalgamated.
  • The opportunity provided by the Big Society Bank (BSB) and the restructuring of the state is a “once-in-a-lifetime” chance to accelerate social investment and must be seized.

The launch took place in a beautiful venue, The Livery Hall, which added further gravitas to the proceedings which were headlined by the Lord Mayor.  Perhaps, when presented with such awe-inspiring surroundings, one can become prone to grand statements, but I felt as if the meeting could herald the start of a new era of institutional investing and was sufficiently moved to call it the start of “3D Investing”.  In my presentation (available here) I noted that, whereas investing had been a two dimensional exercise since approximately 1980, as investors sought to maximise risk adjusted rates of return, we are now entering a world in which a third dimension has entered the calculation: that of social impact.

Before discarding this notion as fanciful and accusing me of being carried away by the moment, I should point out that there are many examples of such trade-offs being undertaken.  How else could the Ethical Property Company, a firm which makes it very plain it will never try to maximise financial return, have been able to raise roughly £20 million over the last decade?  Although most of its investors were individuals, some were from the City and were present in the Livery Hall at the launch.

This is also not the first time a new dimension has been added to the investment equation.  When I entered the financial world in 1980, as an analyst with PaineWebber, investing was one dimensional.  Portfolio managers spoke of “average total return” over the life of an asset or portfolio.  The tumultuous 1970s meant that investors became more aware of their preferences for lower volatility.  Hence the birth of beta and “2D Investing”.

In response to the socially tumultuous period we are now in, is it so surprising that investors are becoming increasingly aware of their preference for positive social impact (as well as their aversion to negative impacts)?  Thus dawns the era of 3D Investing—anyone have a suitable Greek (or other) letter?

Impact Investing, Innovation

A social investment model for financial pharmaceuticals

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Recently I wrote a post on the ClearlySo blog about GSK, the large British based pharmaceutical firm, regarding its decision to cut prices by 95% (!!) for one of its anti-diarrhoeal drugs sold in poor countries.  Diarrhoea is a serious killer so the action will undoubtedly save lives.  While easy to dismiss this as a small gesture, we took the view that GSK CEO was sincere in his claim that this was not a gimmick, but a genuine attempt to adjust its business model.

We raised the question of whether the social enterprise and finance model were well-suited for the pharmaceutical sector.  Financing drug development is a massive/high-risk investment, although there is a SUBSTANTIAL social upside when something worthwhile is developed.  The companies recoup the cost of wasted research monies on duds by charging high prices for blockbusters.  Is there not some way to imagine social investment playing a role in exchange for a different funding model?  Certainly in the developing world; but perhaps even elsewhere?

One of the key issues is that nearly ten years of testing is required by regulators for new drugs.  It feels that this is driven by US legal requirements.  Could this really be the best way to do things outside of the USA?  Again, where the fear of monumentally expensive litigation is diminished, is there not another pricing model available?  Where there is trust, is there not a way to allow for companies to undertake best efforts in the development and trial phase and get drugs into the hands of those who face imminent death, for example, far more quickly?  Could this not lead to a change in the business model?

It seems to me there is a case for social, if not public investment, in the case where there are significant positive externalities generated.  Where public benefits are generated, could not other non-financial costs also be reduced somehow?

It strikes me that the social enterprise and investment model could be tried in the pharmaceutical sector, and the announcement by GSK, subsequently followed up by others, is a useful step in this direction.  I suspect there are other areas where new models could be tried.  What we must avoid, however, are cases such as we had in the case of the trading activities of investment banks.  In such cases only losses were “socialized”.  When the financial equivalents of “blockbusters” were generated the returns were fully “privatized”.  Not a sustainable model—as we have painfully learned.

First Published in Third Sector in June 2011.

Impact Investing

Why social investment remains a rich man’s game

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The UK government has chosen this week to renew its emphasis on the Big Society, with a direct attempt to encourage greater charitable giving. Several ideas have been floated including an innovative idea to offer people the chance to give at the cash point. As laudable as this is, we must ask the question: why are governments so keen to encourage donations, but less so social investing?

The reliance of the third sector on charitable giving is well documented and. Last year, total donations reached £10.6bn according to figures from the National Council of Volunteer Organisations (NCVO). The government rightly wishes to encourage this. It already provides many fiscal advantages and this week’s announcements represent a determination to do even more.

Such advantages are clearly important and most experts agree that without them there would be much less philanthropic activity. In the US, permissible tax deductions are even more important in fostering a culture of philanthropy. The motives behind states for encouraging greater giving are clear: if they did not, charitable giving would decline leaving them to plug the gap.

One thing those who give do not expect is to get their money back – certainly not to receive any financial return.  Such contributions could be said, therefore, to have a certain financial return of negative 100%.  Despite this, governments offer no protection.  The nature of the transaction is known and understood.

Now let’s take the case of social investment.  Here “social investors” seek to create a positive social impact but, in addition, may get their money back and perhaps even a financial return as well.  This is no problem if you are wealthy: you are considered a high net worth individual (HNWI) and permitted to engage in this activity. Firms such as ClearlySo (www.clearlyso.com) and others may offer you a chance to make investments into exciting high impact social businesses and enterprises.

However, if you are not an HNWI, you have no chance. Because we now go from charitable giving to investment you are protected by FSA regulations. Firms such as ClearlySo are forbidden to offer any of these opportunities.

So, in essence, if you are not rich, you are free to lose all your money, but if there is any chance you may get some or all of your money back, or some return, then you are blocked from doing so. This is clearly perverse on many levels.

I understand the importance of investor protection, especially when it concerns those of more moderate means.  My first career was in finance, but somehow this government must devise a means to encourage social investments, which are a newer, and potentially offer an exciting complement to charitable giving. They should not just be the preserve of the wealthy.  Moreover, a government seeking ways to fund the Big Society cannot exclude retail investors.  It should rather seek the means to unlock this powerful potential source of funds.

First Published in Third Sector in May 2011.

Impact Investing

Church of England’s stance opens the way for more social investing

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The Financial Times of 16 April 2011 reported that the Church Commissioners (CC), which manages over £5 billion on behalf the Church of England and its staff, will vote against excessive pay awards in the companies in which they have a stake. Specifically, this will be where bonuses are more than four times basic salary—irrespective of judgements about the worth or value of the specific senior executives. The Archbishops’ Council said the CC will “support variable remuneration which genuinely rewards success and aligns the interests of executives, shareholders and wider society.”

Although I believe the relevance of this one single criterion is open to challenge, the announcement of this bold position by the CC is to be applauded. It also begins to address a key question I have raised before: does the standing presumption that fund beneficiaries only care about financial performance hold up to scrutiny? It is this presumption on which much of the fund management sector’s behaviour is based—and that holds back social investment in the UK. Once this key premise is challenged, the pathway to investment strategies which take social impact into account becomes far clearer.

The CC is able to take this stance from a position of strength in several respects. First, its financial performance has been good—its funds have risen by 15.2% since last year, well ahead of comparator performance of 12.7%. I happen to believe that, over time, investors like the CC, who practice a form of ethical investing, will outperform mainstream competitors. Secondly, the CC is on very firm doctrinal ground. Much writing in the Bible is in opposition to greed, particularly its excess. I cannot say if the CC has surveyed its beneficiaries, as we have suggested all fund managers do regarding their beneficiaries’ ethical preferences, but it is very unlikely that its clergy would object to such a stance. We wish other ethically based groups would show similar consistency. Far more common is the sort of story I heard last week about a well-known organisation whose endowment is invested in shares of a company whose actions cause the sort of damage the charity spends resources combatting. Such harmful inconsistency is what comes from pretending investment and expenditure on good works lie in two separate and unconnected worlds.

By virtue of its strong moral authority, which we have commented on in a blog post from January 2009 (A Golden Opportunity for the Church Commissioners), the CC inhabits a leadership position. By taking a moral stance whatever the consequences, it opens the way for the moral or social impact of actions to be taken into account in investment decision making. Once this occurs, all investments with strong social impact are in play and we then come to the beginning of three dimensional (risk, financial return and social impact) investing. Watch this space!

First Published in Third Sector in April 2011.

Angel Investors, High Impact Businesses, Innovation, Social Economy, Social Entrepreneurship

Skoll World Forum Impressions—The Pluses and Minuses of Celebrity

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I attended my six consecutive Skoll World Forum (SWF) last week. As ever, the featured speakers and the audience were extremely impressive and captivating. Every year I feel utterly exhausted by the end, but every year I return again knowing that this remains the key Forum for social entrepreneurship and investment in the world, despite the continued overrepresentation of practitioners from the USA.

Past SWFs have generally been a bit light on social entrepreneur, and heavier on investors—but this has been rectified over the last few years.  Also on the plus side the sessions seemed to flow better the fringe “Oxford Jam” meeting across the street is now a well-established and valued counterpoint to the forum itself.

The most significant impression I have is of inspiring people who grace this conference in considerable number. This year the highlight was Archbishop Desmond Tutu, who gave a series of impassioned discussions. Who also could fail to be inspired by the performance artist Peter Gabriel, who sang his hit song about Stephen Biko?. The SWF also introduced the Elders, a gathering of the global “great and good” including Tutu (who chairs the Elders) and Nelson Mandela as well as Jimmy Carter and a host of others.  Such super celebrities undoubtedly have the power to do a great deal of good in the world and their activities were explained.

On the other hand, the misfortunes of another global celebrity hung over the conference. Mohammed Yunus, the social entrepreneur behind the Grameen Bank and the person widely considered to be the father of micro-finance, has been very much in the press these days. He is being investigated in his native country of Bangladesh. I will not go into the details, which are not familiar to me and there are widespread allegations that the case is politically motivated. In fact, there was an appeal at the SWF to speak out and campaign on his behalf. Surely, anything that is motivated by political purposes to denigrate such an important and successful individual is anathema to the spirit of social entrepreneurship and the Forum.

On the other hand, his misfortunes appear to be having a negative impact on the micro-finance sector at large, which is also suffering from a range of different issues, and underscore the risks in celebrity. There is no doubt that Yunus has made an enormous contribution to social enterprise and micro-finance, however the unfortunate consequences of this publicity and his strong identification with the sector are now having adverse consequences.  For the social enterprise and investment sector to thrive on a long-term basis it needs a healthy and robust diversity of voices.

What do you think?

First published in The Social Edge in April 2011

Impact Investing, Social Economy

Can bank funds boost Big Society?

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The Big Society Bank has been in the news again this month. Much of this attention focuses on concern that the government is taking longer than expected to get the bank up and running ready for launch. Original plans aimed to have it ready for April. However, the latest we hear now is a quote from Oliver Letwin saying it would start in the ‘not too far distant future’.

A more intriguing issue, though, comes from the on going Merlin talks between Barclays, HSBC, Lloyds and RBS, aimed at securing concessions over pay, taxes and a lending commitment for small businesses. Part of this agreement could include a collective injection of £1bn into the Big Society Bank.

The principal aim of these talks seems to be an attempt to refresh the sector’s image. The banks hope that by making a number of positive sounding commitments, they can reduce the ill feeling coming their way both from within government and around the country. A pledge to support the social enterprise sector through a high profile capital injection to the flagship Big Society Bank would seem to be an excellent start.

The social enterprise sector may instinctively welcome such a move. However, we have to seriously ask ourselves, would this move provide long lasting benefit to social enterprise – or would it be a simple short term panacea to help everyone feel a little better?

On the one hand it would undoubtedly provide extra funding for the bank, which would be welcomed. However, in the slightly longer term taking these funds now could work to the detriment of the sector.

I would wholeheartedly welcome participation in social enterprise from the banks, but it would be far preferable if they engaged in this sector on their own terms. I would ideally like to see the banks investing in social enterprises as part of their mainstream activities. If that were the case investments would be backed by commercial acumen and free from any political strings.

As it stands the deal does little more than offer the banks a way to feel a little better about themselves without achieving anything tangible. There is a real danger that they may simply view any allocation of funds as representing a penance paid. They have done their bit, they would say, and simply walk away. There would be little planning or oversight to ensure funds were directed in the most effective way.

It is important that the banks engage in the social enterprise sector in a proactive manner – not simply because they believe they should. If they did, they would realise the benefits of engaging in what is one of the most vibrant and upwardly mobile sectors in the economy.

One can understand why there would be immense political will in securing participation from the banks in the Big Society. However, while it might offer everyone a distinctly fuzzy glow it may prove to be an opportunity missed.

First Published in Third Sector in March 2011.