Look back to see ahead
In the beginning there was Ronnie, and Ronnie masterminded the 2008 Dormant Accounts Act. He founded Social Finance and, lo, Social Investment was born. And then Ronnie made friends with Nick from JP Morgan, a prince of Impact Investing. Nick had orchestrated JP Morgan’s seminal impact investment report. Impact Investing Nick and Social Investing Ronnie then made friends with The Honourable Nick, Minister at the Office for Civil Society. Big Society Capital was born, and social investment arrived, with bells on, in the UK. Or is it impact investment? Sod it, let’s cover the bases and call it social-impact-investment.
At the heart of that history is a linguistic fudge that sits atop a conceptual fudge. And if we don’t unpick it now, it will fudge up our future. To see ahead, we must (to paraphrase Winston Churchill) first look back.
Ronnie set out with the Commission for Unclaimed Assets to understand how repayable capital could be deployed to help to scale social sector organisations (social enterprises and charities). From the outset, the assurance that an intervention was ‘social’ came from the presence of an asset lock, a barrier to distributions. The compelling promise of Ronnie’s vision was that charities and social enterprises, should they demonstrate their value, might persuade someone (mostly government) to pay for it. This might enable them to access an almost limitless supply of capital. This explains the associated obsession with Social Impact Bonds, which arises from their promise as an instrument that might become the venture capital industry for social transformation – the vehicle through which much of this capital might pass. By deploying vast sums into solving social problems, actually solving them, society is strengthened and the need for government intervention is radically reduced. A virtuous cycle is created that redefines the social contract, with civil society organisations at its heart. This is the powerful idea at the heart of Social Investment.
Meanwhile, some of us (including on these pages) were making the point that all capital deployments in society have a social impact. Not just the 10% of the economy that is deployed in the social sector, but also the 90% deployed in the mainstream economy. Understanding and seeking a net positive social and environmental impact from the 90% is at least as important as social investment. But this is a different point, although it is allied and associated. This is Impact Investment.
So we have Social Investment whose purpose is to enable social sector organisations to access capital. And we have impact investment, which is a movement to reform capitalism by including social impact as a third investment dimension in mainstream capital markets, alongside the classic binary of risk and return.
These two ideas are distinct. Social Investment is an asset class – it is, after all, investment capital deployed into a distinct class of assets, be they real assets, private equity, fixed income and so on. The distinguishing feature of these assets is that they have a primary social motivation and they are asset locked structures. The Big Society Capital Governance Agreement formalises this idea and is, in the UK, where the rubber hits the road. Generally, currently, these assets are where positive social impact is most concentrated.
By contrast, impact investment is not an asset class and it is wrong to think of it as such. All investments have an impact. Impact investment strategies can (and should) be deployed in mainstream capital markets in every asset class, whether fixed income, private equity, cash, real assets, social investments and even public equity. Indeed, in December 2016 Panahpur started a partnership with the Golden Bottle Trust to create just such an impact investment vehicle which we hope to scale over the coming years. In the context of achieving benchmarked returns, our goal is to direct as much of our capital as possible - without compromising our ability to deliver our overall return goals - to the investments that have the greatest positive social impact. We expect these will be social investments, because of our belief that this – currently at least - is where positive social impact is most concentrated.
The point, though, is that these two ideas have been allowed to become conflated. The G8 taskforce evolved into the ‘social impact investment steering group’. Without clearly defining each term, this is risky because these two allied but distinct ideas have different needs. It risks creating confusion, that might set people, who are fundamentally aligned, at odds with one another.
Impact Investors and Social Investors have much in common. They seek the same outcome – a society left fairer, more inclusive, more resilient and more prosperous as a result of investment activities. This matters because the quantum of investment capital deployed for profit by the private sector and foundations dwarfs the quantum of capital deployed by governments and foundations for social outcomes.
Most impact investors want to be social investors (and have greater social impact), and most social investors want to be impact investors (and make more money).
But social investments are a brand spanking new, wholly distinct kind of asset. These assets offer the awesome promise of directly solving social problems. The market in them needs a substantial investment in research and development (i.e. subsidy). It also needs a strategic reboot of government’s approach to commissioning, something that sadly seems lightyears away.
By contrast, whilst impact investment does need policy support, it should not need subsidy. Impact investment is a different vision for capitalism. It is a superior way for the global economy to operate than by pretending, as it currently does, that private sector capital deployments have neutral social impact. It offers the promise of a sustainable social contract where business no longer routinely strips value from individuals, families, communities and the environment because “externalities are nothing to do with me, guv, I’m just doing my fiduciary duty”.
The conflation of social investment and impact investment must stop because it risks creating a mutually assured destruction. There is a fundamental mismatch of expectation – in the risk/return offer of social investments on the one hand, and the risk/return requirements of impact investors on the other. This mismatch results in a logjam, where deals can’t be done. Time is wasted and intermediaries – who rely on transactions - go bust.
Social investments as a set of assets (an asset class) within an impact investment portfolio makes much more sense, because those impact investment fund managers can (must) then accept the characteristics that the social investment market can offer.
Both of the allied but distinct industries of social and impact investment have each come an astonishingly long way over the last few years. Bravo to all concerned. Certain tensions should be expected in both fields - growing pains are a necessary part of growing up.
But some tensions are self-inflicted and result from a cross-purpose conversation that’s been allowed to go on too long. Impact investment is not an asset class. Social investments are. The time has come for all participants, in both industries, to be clear about what they are doing, and about what they are not doing.
James Perry is CEO of Panahpur. Read more about them here www.panahpur.org.