What is social investment?

Social investment means the provision of finance to achieve a combination of economic and social goals. Economic objectives are straightforward, but social goals represent a new frontier in investment.

Why social investment?

Few still argue that our traditional financial markets have functioned well recently. Old responses to social failures, such as government or charitable spending, have come under severe pressure. Today, social investment may be the only way to exploit market forces for positive social change.

Types of investment

Social investment takes many forms. Socially responsible investment (SRI) is the largest area, where investments are made in listed companies which adhere to a set of listed ethical principles. SRI funds may exclude certain sectors (e.g tobacco or armaments) or favour those companies which have a particularly good ethical track record or rate highly on some other non financial measure.

Many large institutions offer SRI funds. At ClearlySo we focus on investment into those unlisted social businesses and enterprises which offer a blend of social and financial return.

Social investments are as varied as conventional financial instruments, but perhaps even more so, as social impact and sensitive mission-related factors play a large role in their construction. In simple terms, there are traditional instruments like debt (short and long term), equity and hybrids of the two (e.g convertibles). Grants are a factor in social finance as are quasi-equity and other structured products. These mimic mainstream instruments, but typically do not offer corporate control, thereby protecting the enterprise's social mission.  

Growth in the social sector

Investing to increase social impact appears to be gaining ground. Bain and Robeco predict SRI investing will expand by 22% per anum. ClearlySo CEO, Rodney Schwartz has also forecasted the coming of an era of 3D investing. In the UK, social enterprise debt and equity investment amounted to £190m in 2010 and looks set to increase.

These increases stem, in part, from shifts in individual behaviour, but are being greatly accelerated by governmental initiatives. The largest of these is the UK's Big Society Capital, an investment bank with at least £600m to deploy towards getting the social enterprise and investment market moving and substantially increasing its scale. This has been followed by programmes in Canada, the US and several European countries, among others. The EU is also developing a strategy in this regard.

Return on investment (social and financial)

Expected returns vary depending on investment. Many people expect a social investment to yield below market rate returns. This is often true, but not necessarily so. Indeed social businesses such as the Body Shop and Ben & Jerry’s have grown into highly successful companies. These businesses prove that it is indeed possible to do well by doing good. Investors and investees should feel encouraged to be open and transparent about their objectives. Uniquely, social investments offer social or 'extra financial' returns, which are difficult to quantify.   

What next?