impact investment - Rodney Schwartz

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. DutchNews.nl 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.

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………

Rodney Schwartz

Tag Archives: impact investment

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

Are the goalposts starting to shift on corporate tax?

Rodney Schwartz