London is Entering a Golden Age of Social Investment

The Director of SharedImpact, Paul Cheng, blogs about Social Investments.

For over 300 years, London has been one of the world’s great centres of financial innovation. Ideas, for example, about how to manage financial risk through structures such as companies limited by shares and the concept of insurance were developed and refined by pioneering financiers in the London coffee houses of 18th century England.

In 2012, London finds itself at the forefront of social investment – leading the world in pioneering developments such as Big Society Capital (the world’s first social central bank), social impact bonds, charitable bonds, a variety of impact funds and new market platforms such as SharedImpact, the Social Stock Exchange and Ethex for selling, marketing and refinancing social investment products.

There is a sense that we are about to enter a golden age of social investment in the UK. Yet there is a real danger that this market could go horribly wrong – and that the hype may triumph of the reality.

So while it is heartening to see more mainstream pools of capital seeking to engage in impact investing, there are also good reasons to be worried about how much of this capital will actually produce positive social change. Will investors choose speed of growth, rather than depth of impact? Will early failures be used as reasons to maintain the status quo? Will poor thinking and clumsy execution make our sector one of ‘feel good’ rather than ‘do good’?

Moreover, what do we mean by “social investment”? Properly defined, social investment is the deployment of capital for social purpose – and which seeks a financial return (but not a profit-maximising one). This last point is often misunderstood. For businesses, profit is an end in itself. For charities, profit (or “surplus”) should merely be a means to an end – or to the fulfilment of a social mission.

We should remind ourselves that the fundamental problem which social investment is trying to address is lack of access to capital.

Charities and social enterprises are chronically undercapitalised. For the most part, they find themselves limited to just one financial instrument – the charitable donation – and most of what they do is financed on a pay-as-you-go basis. The charity sector lives hand-to-mouth – and the sector looks more like a subsistence economy than a vibrant market.

This is in direct contrast to the way virtually everything else of value gets created. No one buys or builds a house without financing it. Almost every business, large and small, at least attempts to make prudent use of debt and equity. But charities are risk-averse, and frequently unaware of the broader range of financial tools that may be available.

As a result, because charities are undercapitalised, they struggle to achieve their social objectives, which in turn makes it less likely they will receive the resources they need. And so the cycle continues.

Social investment aims to put an end to this vicious circle.

Paul Cheng,

Director of SharedImpact (www.sharedimpact.org)