Lack of metrics stalls progress of social impact investment

Big Issue Invest, the social investment arm of the Big Issue, is soon to hold a final closing of its maiden fund. Including £4m from HSBC and significant backing from Deutsche Bank, capital commitments are expected to reach £10m. Alongside the Bridges Ventures' Social Entrepreneur Fund, which closed on almost £12m in 2009, these funds target opportunities in the "middle space that is beginning to emerge between straight charity funded by grants and donations, and pure profit-driven business", according to Sarah Forster of Big Issue Invest. Social enterprises fill that space.

Social enterprises are those that seek to create profit and generate a social return. Given the limited resources available to charities, exacerbated by the dwindling disposable incomes of donors, and the difficult access to traditional financing experienced by SMEs, the growth of such enterprises is often restricted. As austerity continues, these issues look to become more acute. As a result, social enterprise funds are set to become an increasingly important solution to a pertinent problem.

"These are different enterprises that require a different sort of investment and specialist funds," according to Antony Ross of Bridges Ventures. "This is more akin to the hands-on venture investment model, where investors actively engage with both capital and resources to boost growth" he adds. Call Britannia, a Bridges Ventures and Big Issue Invest portfolio company that aims to create employment for the long-term unemployed at its call centres, is one such example.

"I think there has been increasing recognition in the finance world that investors can have an impact by investing their funds in a more responsible way", says Ross, "That cultural shift has started, and we are optimistic that it will continue."

Why then has progress been slow? "Everybody agrees that to get the capital market to move into this area, you need more transparency around social performance measurements so you can measure the financial risk and social return. It is currently hard to compare." says Forster. "It is an area in development. Ideally, what we hope for is to develop common metrics at the sector level so you can begin to compare returns across organisations," she adds.

The development of a standardised metric for risk and return reporting is noticeably absent within the sector. The breadth of target companies united under the umbrella term social enterprise - applicable to a firm seeking to redress long-term inner-city unemployment and another addressing a lack of clean water in rural Africa - renders a comparison of their social impact problematic. A cross-sector system to compare risk and reward is therefore fundamental for the national and international market. Indeed this a primary concern of the Global Impact Investing Network and its Impact Reporting and Investment Standards initiative.

Given the positive social effects, it is easy to conflate social enterprise businesses with the third sector. But let there be no mistake; this is not philanthropy, investors want returns. But do investors anticipate a trade-off between higher social impact but lower returns in social impact investments?

That depends on the market. Not in the venture capital industry in emerging markets, according to a report on impact investment released by JP Morgan and the Rockefeller Foundation. The report states that when making VC investments in emerging markets, investors expect a return of around 10%, lower than the 12-15% expected on a social impact investment in emerging markets. Returns on investments in emerging markets then are expected to compete with, and even outperform, traditional investments.

Within developed markets though, the reverse is true; investors anticipate some sort of return sacrifice. With a distinct absence of metrics to compare returns, it seems this perception may continue to stifle progress.

However, such investments are not to be sidelined; the impact of these enterprises extend far beyond the social realm alone. In a tough economic and fiscal climate, they make an important contribution to economic growth. According to the department for business, innovation and skills social enterprises make a £24bn annual contribution to the economy, equivalent to 1.5% of GDP.

What's more, social enterprises employ at least 800,000 many of whom come from groups traditionally excluded from the labour market such as the homeless, for example. In addition, the upper echelons of such firms usually count a higher number of women and ethnic minorities than traditional enterprises.

The UK government has made the social investment market a priority, as exemplified by the launch of Big Society Capital, a financial institution that aims to stimulate social finance. BSC will make direct investments in social enterprises and by acting as a fund-of-funds, thus catalysing activity. The institution will also invest in financial products including social impact bonds which, based on the concept of risk transfer, sees financial investors reap returns only if the social aims of the project are successful, thus saving public money and promoting social return. Big Society Capital is set to be fully-operational in the coming months. Perhaps its launch will mark an important turning point in the development of the necessary infrastructure to foster innovative social financing.

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• Topics
• UK / Ireland
• United Kingdom
• Bridges Ventures