By: Karen A. Morris, Board Member, The Global Sourcing Council and Chair, GSC Women’s Empowerment Committee
Our GSC community is excited about the human, environmental and economic impacts of sustainable and responsible investment trends, especially the revolutionary potential of the nascent global market for impact investment.
Our founding Board Member, the innovation strategist Karen Morris, reports this month from the United Kingdom on British-led developments in the impact investment marketplace.
“Well, you know, we all want to change the world.”
Surrey’s insipid blue skies have been seeping rain all day. But I am comfortably ensconced beside our crackling fire; the pluvial November afternoon passes pleasantly. We are snug.
A couple of miles down the road in 1968, at Ringo’s country home, John and the rest of The Beatles may have been snug too but they weren’t smug.
Lennon had finished several verses of a new song. His most political work to date.
“You say you want a revolution
Well, you know, we all wanna change the world.
You tell me that it’s evolution
Well, you know, we all wanna change the world.”
Almost half a century later, and comfortable as most of us are in absolute and relative terms, many of us nonetheless want to change the world. The question Lennon was ruminating still obtains. How?
Does it take nothing more than “a small group of thoughtful, committed citizens” as Margaret Meade so famously contended? Does it take protest and civil unrest? Do we need revolutionary or evolutionary thinking to confront seemingly intractable global problems?
Lennon’s “Revolution” continues with the verse:
“You say you got a real solution
Well, you know we’d all love to see the plan.”
What’s the plan? In my retreat from the rain, I just read one…not a complete plan, not a panacea, but a brilliant and encouraging contribution to our understanding and advancement of a potent way to improve people’s lives, social impact investment. I am talking about The Report of The Social Impact Investment Taskforce (SIIT) of September of this year – a taskforce that is in the international vanguard of a revolution in our thinking about philanthropy and private and public sector funding of social progress.
Our 21st Century challenges are too formidable, too complex and
too urgent to be solvable by government and the social sector alone.
The acronym might sound like ‘sit’ but SIIT has certainly not been sitting around since being established under the UK government’s Presidency of the Group of Eight Countries in 2013. The taskforce’s Chair, Sir Ronald Cohen, succinctly gets to the heart of social impact investment: “Social impact investment harnesses the forces of entrepreneurship and capital and the power of markets to do good.”
Sir Ronald knows a thing or two about entrepreneurship, capital and innovation. Dubbed “the father of European Venture Capital”, he is a notable pioneer in impact investment models, the recipient of The Rockefeller Innovation Award for innovation in social finance and the Chairman of Britain’s first social bank Big Society Capital. As the SIIT’s Chair, he speaks of the need to catalyse the growth of a global market for impact investment.
The SIIT Report articulates an action plan for governments and markets. It illuminates and emphasizes the role of government in the impact investment arena. Its recommendations effectively endorse the perspective of successive recent British Governments that government is an important protagonist in enabling investment in social change and progress. The report supplements its recommendations by drawing upon experiences and practices in the UK, which was an early innovator in the formal promotion and enablement of impact investment. The UK, for example, has succeeded in doubling the number of its impact investment funds in the last two years.
The SIIT Report’s authors, over the course of 15 months, consulted deeply and widely with hundreds of experts from around the globe. They advance myriad ways in which government, in collaboration with the financial service and social impact sectors, can purposefully help the supply and demand dynamic for effective capital flow to charitable and social enterprises.
The State is uniquely placed to facilitate impact investment market-building, to act as a market steward and to benefit society as a consequence. They have every motive to do so. Our 21st Century challenges are too formidable, too complex and too urgent to be solvable by governments and the social sector alone. Impact investing offers a third, innovative path to creating, growing and sustaining social entrepreneurship based on a twinned alignment of financial returns and purpose in the funding of social “outcomes”.
Although the origins of impact finance are not recent, consider the cooperative movement in Europe, credit unions in Canada and community development finance in the USA, this sector has only recently demonstrated rapid expansion. The estimated size of impact investments under management globally is now about $50 billion and is predicted to rise to a trillion US dollars by 2020. These are not trivial figures but remain nonetheless a mere drop in the vast ocean of today’s $210 trillion global investment market.
In explaining the thrust of the taskforce’s work, Sir Ronald is clear: “This is not about increasing or reducing public expenditure but helping government to benefit from innovation and private sector capital with the money that it has.”
The impact investment model augments governmental and social entrepreneurial efficacy; it does not imply that government dilute or deny its responsibility for social issues but rather that government tackle them in a fresh, preconcerted way. By encouraging and distributing innovation outside and then drawing it within, government both engenders and extracts value. Due to its rigorous emphasis on measurement and accountability, the impact market model creates greater net value across dual social and financial measures.
The SIIT recommendations touch on many potentially useful measures ranging from legal structures, laws and regulations, to the funding of intermediaries, the design of financial products, and to governmental behavior in the commissioning and procurement of services and more. All of the foregoing can stifle or stimulate funding flows into the social investment economy.
Government can make it easier
On the supply side, the report explores forms of finance, such as grants, loans and Social Impact Bonds, channels for impact capital, such as social banks and impact investment intermediaries and sources of capital. Recommendations examine ways to support the provision of capital to the social impact sector by raising awareness, removing obstacles and improving infrastructure, platforms and standards. Diversifying the investor base to encompass a broad gamut of funding sources is also critical whether it be from institutional investors, Sovereign Wealth Funds, pension funds and others, to philanthropists, corporations and private individuals.
Government can make it easier for the investor base. The report urges, for example, that we refine and clarify the legal duties of the trustees of charitable foundations and pension funds so that they can legitimately evaluate social impacts along with the financial returns of investments without fear of being in breach of their fiduciary obligations.
The Chair emphasizes the importance of this disambiguation:
“There should be no room for doubt that trustees responsible for other people’s money can be prudent and responsible when they incorporate impact alongside risk and return in their decision-making.”
Government can also reward socially-conscious retail investors fiscally for directing their assets to impact funding. A pertinent UK example is the Social Investment Tax Relief rates introduced in the 2014 Budget which will allow eligible investors to deduct 30% of the cost of impact investment from their income tax liability.
Another compelling recommendation underscores the need to create infrastructure, such as government funding for social incubators or for risk/mitigation risk-sharing mechanisms, to address impact entrepreneurs’ hefty challenges in raising early stage risk capital. Creative examples abound from all over the world.
An integrated global solution
The report is forthright that solutions, structures and tools will vary by context, jurisdictional, political, cultural, social and so on. Nonetheless, we must aspire to a multi-faceted and integrated global solution. And just as any innovation-centric conversation thrives on the exchange, combination and recombination of diverse ideas and insights, this reports’ discourse is rich and varied in its array of allusions and illustrations.
Underscoring this from a moral and economic perspective, Pope Francis is quoted in the report: “It is urgent that governments throughout the world commit themselves to developing an international framework capable of promoting a market of high impact investments and thus to combating an economy which excludes and discards.”
It’s an astonishing feat for a concept to have such catholic and Catholic support, from politicians, economists, social scientists, impact ventures, investment bankers, money managers and more, including the Pontiff.
Moreover, if the G8, representing some of the world’s richest countries recognizes the imperative to find innovative ways to fund responses to major social challenges,and places impact investment so visibly and vocally on its agenda, the relevance of finance innovation to the world’s emergent and developing economies cannot be understated. In the SIIT Chair’s words:
“Impact investment can transform development finance because it can add momentum to existing private sector development efforts.”
On the stimulation side, an obvious area of government influence is in commissioning and procurement where policy and practice of government agencies could revolutionize both government spending paradigms and the relevance of the social impact sector. In this regard, government wields power at scale, but so too, collectively, can socially-minded consumers and corporations. But, here the call is emphatically for a mind-set shift that focuses on paying for and commissioning outcomes, “paying for success” not just for goods or services.
Government can also increase demand by helping social enterprises become “investment-ready” for funding with the caliber of governance, transparency and measurement-oriented practices that will render them attractive investment targets. Equally, they can be assisted in acquiring organizational competencies geared to achieving scale and financial stability, such as by liberalizing constraints on revenue generation and lifting restrictions on certain legal forms’ entitlement to funding. It is also important to expand the class of impact-driven organisations with grant-reliant organisations at one end of the spectrum, pure charities if you will, and for-profit businesses with significant impact-outcomes objectives at the other.
To read more about the Social Impact Investment Taskforce and its recent 2014 Report: http://www.socialimpactinvestment.org/about.php
Innovation and an eco-system to stimulate innovations recur thematically in this report. The UK is cited for being the innovator of Social Impact Bonds (SIBs) also termed “pay for success mechanisms”. SIBs are one incarnation of finance instruments specifically geared to social improvement in which investors’ returns are linked to the measurable success of the social outcome of the funded initiative. The first, The Peterborough Bond, was launched in 2010 involving 17 foundations and charitable trusts to combat prisoner recidivism. It looks set to achieve measurable success in its goal and accordingly to provide a healthy return to its investors. Subsequent, similar bonds have been issued in Australia, Canada, Germany, Japan and the USA – and with many more in the pipeline, SIBs are growing rapidly in scale and scope, covering an expanding range of social problems.
Goldman Sachs, a prominent actor in the field of social impact bonds, provided a concise explanation of these instruments in October 2014. Click here to learn more: Social Impact Bonds
As previously mentioned, impact investment promises to be transformative for development finance. Here, outcome funders are foundations or aid agencies. Already, innovative financial tools are being investigated to improve the provision of education in Rwanda, provide malaria solutions in Mozambique and to combat sleeping sickness in Uganda. India launched its first Development Impact Bond this year to improve girls’ access to primary education in Rajasthan where 3.7 million girls currently go unschooled.
In the face of the many and diverse social issues that beset us, “we all want to change the world.” Impact investment is one of the ways we can. It is one of the ways to conjoin money and meaning and to connect investment for return with human-centered purpose. This report gives uplifting insight into the power of the possible when capital, entrepreneurship and innovation converge in the cause of improving lives.
In “Revolution”, Lennon’s conclusion was optimistic: “Don’t you know it’s gonna be alright.” The ebullience of youth? Perhaps, or simply a reminder that to be purposeful and tackle the terrible and terrifying challenges of humanity, we must not lose hope, never stop innovating and learning and always care about what we cause. “Alright, Alright, Alright”.About the Author: Karen Morris is a strategic advisor to national and multinational companies. She is also a frequent speaker and writer on innovation and leadership at global forums and conferences around the world.