McKinsey & Co began a programme of research in 2011 entitled the Cities Special Initiative. One result of which is a report How To Make a City Great. The short video below offers the company heads a chance to explain their thinking on the project and developing cities around the globe in general.
McKinsey, despite their reputation for defense of naked capitalism and overwhelming shareholder benefit, have a strong record in fostering participatory public sector projects. This report nicely captures some of the philosophy around community and public sector engagement, as well as clearly recognising that pure economic growth in the city or city region does not always automatically deliver social justice or environmentally friendly development. It is refreshing to hear it.
We have recently published an article arguing that the social business sector, or the general economy, may be entering a new social business modality…a revolution in approach, if you will. Read more about community economics here.
It is doubly refreshing to see scions of corporate advance taking a collaborative, community engagement and environmentally concerned tack in this report. The report offers a number of key concepts that cities around the globe embrace, in order to become more economically and socially successful than their peers.
Achieve smart growth
Do more with less
Win support for change
Making a great city anywhere…
Achieving smart growth is based on four key principles, adopting a strategic approach to development, planning for change with the environment a key part of that change, and delivering work that insists on opportunity for all.
Cities do more with less when they manage project expenses with real vigour and rigour. When partnerships are fully explored with realistic outcomes and humanity in their engagements. They make accountability for the project investment paramount and finally, embrace new technology in data, communication, marketing and collaboration.
Cities, the report argues, do best in winning support for change when they build projects and sub-projects around a personal vision, affording charismatic ambassadors for the work to lead from the front. Building teams that are committed and skilled in their areas of expertise, whilst still making all accountable are key drivers to success. And finally, although we have heard this many times in the past in a variety of settings – strive to forge stakeholder consensus, listening, reflecting and empathetically working together to achieve city wide advance.
The report offers some great examples of how fresh thinking can triumph. The city of Toledo, whilst only ranking 182nd in a Forbes list of Best Places for Business in the US, still managed to attract $6 million of Chinese industrial manufacturing investment recently, by sending their committed and persistent city mayor to China three times.
Conversely, the Chinese city of Chengdu, regardless of the rigidity and conservatism of regional government in the country, has a dynamic mayor who has changed the department of Migrant Control, a large issue for Chinese cities, into a department of Migrant Integration – with a clear mandate to increase uptake of education, health resources and community resources – adding to the expanding city’s human capital and enterprise creation.
These issues of quality of life for residents and for economic growth really matter. Urbanisation is not diminishing, it is increasing. By 2030, 5 billion people, 60% of the world’s population will live in cities. 1 billion live in slums, so that not only is affordable housing a key priority, but economic growth – ethical, environmentally careful and socially inclusive – are also compound elements of a great city.
We think the ‘talking heads’ at McKinsey are, in the short film above, describing a city based on the principles of social business. They are just not saying so. The global examples offered in the report text are wholly contingent with the idea of enterprise creation, albeit with social equity and quality of life as an admixture of success.
Also interestingly, if we take the key thematic lines of the report about doing more with less, accountability and good, practical team work across development agendas, we think there is a template for rural communities emerging, who could use these key philosophies to enhance non-urban employment, communications and technological access too.
Which community would not want that, urban or ex-urban?
The SEEM Team – thinking about good ideas
Ethical business with a social dimension…
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As we leave the summer holidays behind in 2013 we will be adding a new occasional feature to Mining the SEEM. Explanations.
Part of our social finance mission at SEEM is not only to make finance more accessible to communities and social business, but also to help that constituency understand and be more usefully equipped to negotiate their way through their financial development,
Explanations will be our way of developing that understanding. Taking a key concept, phrase or idea in economics, banking or social finance and offering up a classic definition for it.
Part of the problem with technical definitions is that technicians and technocrats also use even more technical language to define their concepts – perhaps obfuscating the idea even further.
If key concepts are used in the definition we will also add some supplementary explanation in plain English to frame the definition we have created. You can see an example of this occasional journal entry below – Fiscal Drag.
(If you come across a classic piece of finance speak or strangulated phrases in banking drop our editor a line and we’ll tease out a clearer view and publish the definition for you.
Contact us at editor (at) miningtheseem.org.uk )
Fiscal Drag – a definition
The restraining effect upon the growth of demand and output that results from increases in the effective rates of taxation under inflation. This happens where progressive tax rates and increased wages and salaries bring people into higher tax brackets, even though real income may be falling…
Supplementary definitions:
Inflation: The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum. (See more about inflation on investopedia.com here. )
Progressive tax: The term is frequently applied in reference to personal income taxes, where people with more income pay a higher percentage of that income in tax than do those with less income. (Read more about progressive tax concepts on Wikipedia here.)
Real income: Income, as of a person, group, or country, that has been adjusted for changes in the prices of goods and services. Real income measures purchasing power in the current year after an adjustment for changes in prices since a selected base year. ( Read more about real income calculation on the pages of the Free Financial Dictionary here. )
The SEEM Team – working with interesting ideas
Ethical business with a social dimension…
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The Treasury recently announced an increase in the budget allocation for the Coastal Communities Fund. Next year’s fund will be worth £29 million, an increase of 5% on the 2013 level. Government has committed the Fund allocation to 2016.
The Fund was established with the intent…
to invest in seaside towns and villages, helping them achieve their economic potential, reduce unemployment and create new opportunities for young people in their local area.
Forecasts for the first round projects across the UK are that the Fund will generate 5,000 jobs and 500 apprenticeships. You can see a map pinpointing the successful first round projects here.
Retail businesses in the Eastern region can share in a £250,000 fund to help improve their digital technology thanks to the Greater Lincolnshire Local Enterprise Partnership and Lincolnshire County Council. (£200,000 of the money has come from the Department for Communities and Local Government, via the Big Lottery Fund, operating as the BIG Fund. Lincolnshire County Council is contributing a further £50,000).
The Council and the LEP are developing pilot areas in which businesses can bid for the funds. Once the pilot areas are identified, businesses in those areas will be able to bid for a share of the money from April 2013 until the end of March 2015.
In the wider Coastal Communities Fund context the successful bids for round 2 will be announced in the autumn and nominations for round 3 are expected to open in early 2014.
Finally, Lincolnshire does have Digital Business Cluster presence on LinkedIn. Although specific funding is targeted at distinct areas of the County, joining a LinkedIn group is a good way to keep up to date with developments across the county. Read more here…
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We strive for a fairer world, with a more balanced wealth and reward distribution, coupled to a stronger feeling of community response and renewal from the econo-political systems that govern our lives.
This life is a complex and often contradictory experience, with cognitive dissonance – the ability to hold two competing and conflicting beliefs at the same time, particularly evident in our view of economics, trade and banking.
We accept outrageous levels of pay and reward for the minority as a way of perpetuating the systems and processes which provide the rewards for the few. Or do we? Is it rather that we co-operate with a dissonant system of reward and effort in order to preserve our own interests, whilst still feeling uncomfortable about the less well off, the least effective and the disenfranchised communities across the globe?
From the individual view point this might appear rational. From the viewpoint of mainstream commercial and financial mega-corporations this might appear rational. But is there another paradigm emerging in modern economic structures that will gradually change the foci of these denizens of the corporate depths?
SEEM’s meta-view when looking at the financial and social landscape is well stated on our main website…
We think there is another way of doing business that takes a more balanced and blended approach to profits, people and the planet…
This article argues that the new model emerging, which others have called Community Economics and which we have explored in individual elemental form in recent Mining the SEEM journal posts, is a critical driver of perhaps monumental change in the financial world.
Arguably, as powerful a shape shifter as the emergence ofManchester Liberalism in the nineteenth century, or the infamousQuants of the late twentieth century.
Ben Hughes, recently writing for the Community Development Finance Association (CDFA), highlighted the work done by the CDFA and the Community Development Foundation (CDF) in mapping a new Community Economics (CE) framework for the UK. His article also nicely defined the CE concept in the context of this article…
Community Economics is a model that harnesses the skills, knowledge and capability present in all communities; it has the potential to bridge the gap between rich and poor that current, free market economics create, and that we know is failing an increasing percentage of the population denied access to the finance needed to create jobs, opportunity and capability.
The CDFA work goes on to detail some significant structural changes that are under way or which are needed.
Recognising that the local supply chain and enterprise drivers are the bedrock of durable economic change and effectiveness. Community finance, social business and patient capital investors are key lenses through which to view this focal change.
Work towards the establishment of Community Banks, in which CDFIs, credit unions and social investment finance intermediaries play a pivotal role. Importantly, the CDFA stress, oversight and regulation will be driven by the FCA.
(Not a trace of irony here though. We would argue that the constituent players in a Community Bank infrastructure, wholly committed to ethical business, social value and community outcome would truly need only ‘light touch’ regulation, unlike the historic performance of their mainstream predecessors).
Make double and triple bottom line accounting and accountability the norm, not the exception.
Banks are going to release their spatial lending data. Use it to plug gaps in the community ‘capital deserts’ so identified. Exact a Community Investment levy of 25% on bank profits and ensure that investment in areas of high social need becomes a priority.
Develop a nationally recognised score card for banks, tilted towards their social investment performance.
(But couple this to a national advertising and media campaign to make communities both aware of its significance, but also make its value part of the social norm and conceptual thinking for bank mainstream customers…and bankers, we would argue).
Ben Hughes argues that much of this structural development is already extant, which if properly capitalised and managed could transform the CDFI landscape.
To summarise to this point. There is arguably a philosophical change in the economic, enterprise and banking landscape. This is, by the above analysis, realised in two ways.
First, the naked, free market capitalism of the nineteenth century has now been subject to a prolonged critique, which over time has seen the emergence of Social Finance organisations with powerful ethical and community drivers and, most importantly, the emergence of a new form of investment and investor, responding to the community critique.
Second, the complete disconnect between banking, investment and communities has itself been under attack. The activities of the Quants, essentially gambling with others money, the loss of which only realised inflows of more public money, is itself discredited.
The Social Finance movement, the concept of Community Banks et al, are all about re-aligning capital, markets and communities. Where the economic activity takes place and what the human effect will be really matter. In a system where machine trading with capital takes place, this local impact is totally irrelevant, whilst at the same time being the most transformative outcome to be expected, we would argue. (Cognitive dissonance at play…).
There is a third change in the twenty first century which is intimately aligned to the two structural tensions detailed above. It is also connected to the delivery of the Community Economics model. Without a delivery ‘vehicle’, the practical application of theory, then concepts remain just that. Interesting, but none the less, useless as a mechanism to increase human capital and self reliance.
The last part of this article delineates this third conceptual change and stresses the importance of its emergence to social finance. The arrival of the Social Entrepreneur.
Elizabeth Chell, in her book The Entrepreneurial Personality – a social construction, charts the emergence of the entrepreneur from the start of the Industrial Revolution and the claim and counter-claim of mainstream economic theory over the centuries.
Chell cites the contribution to economic theory of the economist Israel Kirzner (born 1930) a member of the Austrian economic school. For Kirzner the entrepreneur is critical to the market. He or she is always alert to ‘profit opportunities’. Kirzner, in his theory of the entrepreneur is also aware of the importance of ‘vision’. Seeing an opportunity extant in front of you is one thing, imagining the effect of the opportunity after investment and development is, Kirchner argues, a completely different skill set.
Kirzner’s concepts build upon the theories of Joseph Schumpeter (1883 – 1950). For Schumpeter the entrepreneur’s role is to ‘…disturb the economic status quo through innovations’. Arguably, Schumpeter was conceptualising about entrepreneurs still deeply embedded in mainstream economic activity. Profit and return on investment for the welfare of the few.
Chell goes on to examine the work of sociologist Anthony Giddens (b.1938) and the Evolutionary Economist Ulrich Witt (b.1946) – exploring the argument around structure and agency and how the entrepreneur fits a contemporary economic model. Giddens argues that the structure and a means of delivery adopted by the entrepreneur depend on the social norms of his or her day. Witt argues that creation of enterprise by an individual depends upon imagination, force of argument and a conceptual belief by others.
It is in this evolved and evolving complex socio-economic structure that the social entrepreneur inhabits in the twenty first century. To return to Kirzner. He has a dictum ‘…the entrepreneurial function is to notice what people have overlooked’. Nothing could be truer with regard to the final player in our own argument.
Creating a World Without Poverty – Social Business and the Future of Capitalism is a book by Muhammad Yunus (b.1940). In it Yunus argues that ‘...unfettered markets in their current form are not meant to solve social problems and instead may actually exacerbate poverty, disease, pollution, corruption, crime and inequality’.
Whilst recognising the important contribution made by large charities to resolve some of these issues, Yunus argues that the solution, a permanent solution to them, does not lie in the hands of charitable endeavour. In third sector settings demand always outstrips supply.
Yunus also argues that Corporate Social Responsibility (CSR) is a good thing. However, the unscrupulous capitalist can still turn CSR to profit by adopting the word, but not the spirit, of a belief in social action and outcome, he argues.
He proffers a solution, a hybrid if you will, which combines the key concepts of a profit maximising business (PMB) with the passionate commitment of the social entrepreneur. For Yunus the Social Entrepreneur is driven by egalitarian, social and ethical drivers – to achieve community change by using the PMB processes for social ends.
A social business, her argues, which donates surpluses to useful charitable ends is to be welcomed, but for Yunus it is the Social Entrepreneur, using technology, new investment models and innovative conceptual thinking that will sustain the social business model.
We would liken it to something we might call the SEEM ‘Knowing Watchmaker paradigm’. I need a watch which is accurate, reliable, fully functioning and comfortable to wear. I need it to get to my next social business meeting on time…but it does not have to be a Faberge timepiece!
Deploying our Knowing Watchmaker paradigm as a metaphor for business structure, it is interesting in all this debate about structural change, social business and community outcome, the old Left, rearguard arguments of the destruction of capitalism and levelling all have completely disappeared. They have been replaced by observation, data and philosophical change that put community and charismatic social leadership to the fore.
Our Knowing Watchmaker can, in an imperfect global economy, as a social entrepreneur still recognise an opportunity to sell his masterful timepieces at a ‘luxury’ rate. In this imperfect world there will continue to be individuals or corporations who wish to spend their surpluses on luxury items.
This neither diminishes capitalism, nor does it redact his technical expertise, long in the acquiring – but where our Knowing Watchmaker differs is that his or her hypothetical workshop is a social business, (…created with professional support from SEEM of course), where the profits are certainly deployed to restock and energise the business with R & D, but the majority surplus is dedicated to the community that both makes up his or her workforce or from which they and their families emerge.
This is still the market at play, striving for equilibrium, but where the failing ‘invisible hand‘ of Adam Smith has become the contemporary guiding hand of social conscience.
If we are rapidly approaching a new Giddens/Witt economic nodality, which we would argue is evident, then having Knowing Watchmakers in the economy is both vital and their proliferation evidence that we have reached a tipping point with capitalism.
In a key section in his book (Where will social business come from?) Yunus extols the energy of youth as being a key motivator in extending the social business franchise across the globe….
…young people fresh out of college or business school may choose to launch social businesses rather than traditional PMBs, motivated by the idealism of youth and the excitement of having an opportunity to change the world.
We couldn’t agree more. If you know a budding social entrepreneur help them verbalise and form their delivery – invest in them. Their time has come. Long live the Knowing Watchmaker…
The SEEM Team – working with interesting ideas.
Useful reading:
Elizabeth Chell, The Entrepreneurial Personality – A Social Construction: publ. Routledge, 2008
Muhammad Yunus, Creating a World Without Poverty – Social Business and the Future of Capitalism: publ. Public Affairs, 2007
The Office for National Statistics (ONS) has just published its new preliminary data for Quarter 2 contributors to Gross Domestic Product in the UK. It is the first time, according to the ONS, that all principle sectors of UK business have seen positive growth since mid-2010.
The short video below illustrates the ONS data, showing how core business sectors relate to each other and contribute the UK economy as a whole. Services, as a broad economic theme, now represent the largest contributor to ‘UK Limited’.
Aggregated services in the analysis has continually performed well, since the massive economic contraction in 2009. To have so many core indicators rising must be a sign of improvement, or rather a sign that using traditional metrics, the economy has begun to recover.
What is never delineated in such metrics or traditional analysis is the change of thinking, or ‘modality rotation’ that might be occurring as a result of downturns altering mindsets, philosophical attitudes to investment or changes to the political landscape in communities.
In our next, fuller journal post, we will examine the concept of ‘community economics’, and how the emergence of ideas, which we have commented on in recent Mining the SEEM articles, have arguably coalesced into a new economic form.
Becoming generally available from the Cabinet Office in July 2013, the analysis of the social impact market by Maximilian Martin, Status of the Social Impact Investing Market: A Primer, sets the scene well regarding the subtle shape of the market and how a whole new eco-system of investors and vehicles for their capital have emerged, and are still emerging, into this relatively new field.
The world view – from the UK Cabinet Office
We recently published an article featuring the latest report from New Philanthropy Capital, Best to Invest, which we stressed was a primer for the structure of the UK social investment market. You can read more here.
The Martin position paper in this article looks at the broader, global context of the social impact investing model and examines the origins of the market meta-structure across the globe, with some interesting analysis on the developing gap between public demand for new social investment and the ‘public’ finance shortfall in meeting it.
This huge gap, Dr. Martin argues, is ripe for topping up by private capital, or capital from non-traditional sources, which deployed by the social outcome minded investor can transform community landscapes – in both the developing and developed world.
Based on recent studies by Accenture and Oxford Economics, the projected public services world expenditure gap is of enormous proportions through to the year 2025.
The Canadian shortfall estimated is 90 billion US Dollars (USD). the German gap some 80 billion USD and the UK expected need is for an additional 170 billion USD in investment over the same period.
This pan-global approach is interesting, in that the Martin paper shows, that when seen globally, responding to social investment demands can stimulate traditional and mainstream market provider outputs. Martin quotes the example of the French company, EDF, who in 2002 began a programme of investment in Morocco to bring electricity to the 10% of the country’s population with no access. to power. EDF’s innovative partnerships brought dividends in market development, new market creation ideas based on its approaches to the Moroccan market and proved the power of public/private partnerships for them and their shareholders.
The problem they were trying to solve was, according to Martin, the pent up demand generated in all economies by the ‘Bottom of the Pyramid’ (BoP). Martin argues that the efforts of the World Bank, pan global organisations and national governments have failed to eradicate the contentious issue of millions of humans living on less than 2 USD per day.
A tidal wave of human potential – untapped still
Even as early as 2007 we had a clear view of the world from the BoP. This short executive summary from the World Resources Institute gives a insight into the lives of four billion people and the latent economic potential these communities have. (Being lower down the World Bank Pyramid is not, for us, an economic failure, it is a sign of unrealised economic and human potential)
In economies, scale is everything, and whilst veering away from any descriptor of communities as a residuum of society, a deeply negative, high Victorian view of the pryramidal effect of social and economic power and facility, the Martin model also has resonance for local communities in the UK, we would argue.
If innovation and bold thinking about investment, the risk supported and partially mitigated by mainstream government infrastructures, then change and transformation in societies where the median income level is significantly higher than 2 USD per day, where educational and functioning literacy levels in matters economic are that much higher – surely we can use social finance to turn the pyramid upside down?
Read the Cabinet Office primer and let us have your take on the global narrative too!
Sometimes looking over the wall at what your neighbours are doing to the landscape of their garden can give you ideas for your own. In this short article we have looked across the Atlantic Ocean to see how, in the last couple of years, the Canadian Social Finance sector has responded to community and governmental demand for increased active social investment from the private sector.
Encouraging social investment: Canada
Towards the end of 2010 the Canadian Task Force on Social Finance issued a major report – Mobilising Private Capital for Public Good. The Premier of Ontario, Dalton McGuinty, defined the work as being to ‘…help social enterprise and social purpose business adopt social innovation business models; and develop recommendations to enhance public and private sector support for social finance to unleash its full potential in Ontario‘.
The report offered seven recommendations to the burgeoning Canadian sector…
1. The public and private foundations should aim to invest at least 10% of their capital in ‘mission-related’ investments by 2020. They should report annually on their progress.
2. The country should establish an Impact Investment Fund, supporting existing activity and encouraging increases in scale and new fund creation for the sector. Regions with no fund should be encouraged to create one.
3. New bonds and legislative change should occur, to foster and incentive flows of private capital tot he social finance sector.
4. Pension funds should deploy their assets into social investment, with government ensuring that the pension funds are mandated to do so, and to offer pension Funds incentives to balance and mitigate any additional risk.
5. Policy and regulation should change to support social revenue generating activities in the charity and not for profit sectors.
6.Tax incentives for social investing should be exploited, encouraging capital to be channeled to social enterprises offering maximum social and environmental impact with their activities.
7. Business development programmes, training and business support initiatives from central government should be tailored to specifically engage with social businesses and not just ‘mainstream’ SME organisations.
Whilst it can be argued, looking at the Canadian shopping list, much work of a similar nature has been started in the UK. However, the push towards incentivising pension funds, delivering mainstream flexed business support directly to the social sector and the adoption of a very broad and generous tax incentive led attitude to social impact investing would add new dimensions of transformation to the UK sector.
The report, Mobilising Private Capital for Public Good, develops the recommendations above and offers examples and capital forecasts for their deployment. Interestingly, the outputs recommended were assessed in a follow-up report one year after publication.
After a year – what happened? Canada
This action and output summary, Measuring Progress During Year One, shows that some 50 million Canadian Dollars (CnD) of new mission investment had been generated by the private sector. New government and private fund partnerships had created 284 million CnD of additional impact related investment, with some 215 billion CnD of assets under management by pension funds who are now signatories to the UN backed Principles for Responsible Investment.
The follow up report highlights some achievements and illustrates how the Canadian debate is starting to have a transformational effect of the country’s social impact investment landscape. In the final analysis there is still huge opportunity in this dynamic economy to take the social investment message forward.
In concluding the report illustrates a late 2011 survey on SME take up of government backed services for the SME sector. Only 5% of the SME survey clearly identified themselves as having social outcome considerations. 93% of the survey cohort expressed ‘ambiguity and confusion’ over social investment issues. With 2% of the government services used by those surveyed explicitly excluding non-profits and the social sector.
Canada has a long and successful history of not for profit and social impact development. These reports show that even with history, public opinion and buckets of radical thinking there is still much to be done.
Overcoming perceptions of enterprise ‘drag’ in communities
Nick Clegg, Deputy Prime Minister and the the Department for Communities and Local Government (DCLG) have just released a new report Ethnic Minority Businesses and Access to Finance, which following talks with the British Bankers’ Association, commits mainstream banks to a series of policy initiatives to support enterprise in ethnic minority communities.
…the government has agreed with the British Bankers’ Association that the banking industry will commit to a series of measures to improve access to finance for ethnic minority business groups. This includes collecting data through independent research, for the first time, on the experiences of ethnic minority businesses seeking finance.
The Ethnic Minority Businesses and Access to Finance report was published on the 30th July 2013 by the Communities Minister, Don Foster – with the analysis in the report indicating that there is already much good work underway to enhance enterprise funding in these target communities, but that there is also still much to be done.
The report tells us that business in ethnic minority communities carry a quintuple burden to accessing finance…
shortage of collateral
low credit scoring
minimal formal savings
an unestablished financial track record
the difficulty of language barriers
Whilst some of these drag factors can be attributed to any sector where social finance is deployed, for example, language and culture can be additional burdens on enterprise creation in a dynamic, culturally mixed and enterprise leaning community.
The report does recognise interestingly, whilst there is no apparent discrimination or prejudice in play within mainstream financial cultures, the report states, there is strong evidence that ethnic minority entrepreneurs perceive this to be the case and that access to mainstream financial advice and guidance is, in itself, seen as an intimidating process.
The report suggests that banks and mainstream lenders must make a continued commitment to overcome these mis-perceptions.
Finally, the report outlines the role that Local Enterprise Partnerships (LEPs) can play in supporting the policy roll-out, and the particular relevance that Community Development Financial Institutions (CDFI) and alternative sources of finance can play in supporting ethnic minority community enterprise.
Promoting these alternative finance schemes is a strong part of the report action plan, which coupled with our sector knowledge of local communities and awareness and sensitivity to cultural norms, can only endorse the role that Social Finance can play.
On balance the report is well considered and broad in its scope and to be welcomed. The elephant in the corner, despite the passion and commitment of the Social Finance sector, is how committed mainstream banks will be regarding pressure to lend and fund business projects. Their track record to date, even towards core SME support, is not one of sparkling achievement.
Social Finance explained by NPC – clarity and analysis
Published by New Philanthropy Capital (NPC) this month, Best to Invest is a detailed analysis of the Social Finance market, illustrating how investor readiness, sector awareness, governance frameworks and emerging opportunity in the sector have a conditioning effect on present delivery and outcome.
The detailed contents offer insights for both funders and investees when looking at the Social Finance sector. NPC describe the market as being…
…structured around three main players: investors, which include government, trusts and foundations, individuals and corporates; intermediaries, for example Big Issue Invest, Social Finance and Charity Bank; and investees—mainly charities and social enterprises. Investors supply capital to investees either directly or via intermediaries. The investment may take a different form depending on the needs of the investee, the preferences of the investor and the products on offer by the intermediaries.
Best to Invest offers the following four barriers to making social investments in the present market context…
The social investment market is not yet mature – opportunity costs to entry can be high, with opportunities to invest only now beginning to widely emerge.
Good financial returns on endowments need to continue – organisations created in perpetuity need to maintain their levels of income to sustain grant giving as a continued and effective model. Divergence entails risk.
Social investments are often complex instruments – governance is often created in different forms for each investment, whilst organisations may lack core skills and advice professionals in tangential sectors are not yet fully up to speed with sector delivery. (Complexity is well illustrated in our recent journal entry Social Impact Bonds – impactful or not…read more here).
Regulatory and legal context for investment is also changing – which can be a deterrent to trustees and others, who may perceive a lack of investment advice relevant to the project being considered.
NPC tell us there are two kinds of social investors, those who invest for financial return and those who invest for social return.
In the first case there appears to be evidence that the finance first investor is the one who is looking to diversify their portfolio, to include a social element to their market approach. They will, however, still be looking for a near market rate return on their capital.
The second category of investors, those most interested in social impact, NPC tells us, are often willing to sacrifice their return in order to receive stronger social aims delivery, or to make this sacrifice so that the investment basket which may include more mainstream investors, thereby making a more viable social return.
Perhaps this is the future of Social Finance, where the pool of capital is drawn from a mixed swathe of well-motivated investors, each with their own expectation on return? (Although, clearly, this would not diminish any of the complexity arguments in the NPC analysis).
On balance the NPC report makes a strong case for an energised Social Finance market. One which is growing, but which contains elements of delivery, governance and risk that are not for everyone.
Social investment is an attractive proposition for funders. Alongside grants, it can help them achieve their mission by enabling charities and social enterprises to scale up their work, develop new activities, and become more sustainable by developing a reliable income stream.
It can also help funders to maximise their social impact by aligning their investment values with their grant-making values. Social investment makes funders’ money work harder: funders can recycle their repaid funds into new investments, meaning that the same money can create social impact several times over.
If you are interested in the Social Finance sector, or developing a taste for investment in the market, then Best to Invest could be the sector primer you have been waiting for.
The Archbishop of Canterbury, Justin Welby, has recently publicly committed the Church of England to the development of the Credit Union network. The church has a ten year plan to develop community credit unions and to make knowledge of their services more widely available.
How to grow credit unions – a feasibility study (DWP)
It is possible that the Church is basing its current development narrative on a feasibility report, published last month by the Department of Work and Pensions, as part of the DWP Credit Union Expansion Project.
The report found the current context of credit union activity populates a community finance landscape with the following characteristics…
1.4 million have no transactional bank account at present
4 million people incur bank charges
up to 7 million people use sources of high cost credit
more than 60% of the 4,500 people consulted for the report said they would use a credit union, if one was available to them…
The report also contains findings that the 80% of 95 credit unions consulted agreed that fundamental change was needed in their organisation and there was recognition that they could, and should, offer more modern financial services.
It is recognised in the report that traditional mainstream banking has created, according to British Bankers Association data, some 4 million basic bank accounts since 2003. This number is unlikely to increase in the future now, unless the mainstream banks are compelled by legislation.
The report offers a narrative about change and growth in credit unions at some length. Capacity to deliver and scalability are the key issues, with the DWP positing an argument that a central umbrella body should be responsible for the tactical growth of credit unions and the creation of a sustainable financial structure.
There are weaknesses in this position. A new umbrella body co-ordinating needed change and ‘managing the money’ runs the risk of becoming another mainstream player in the national financial market. Modern products can quickly develop into yet another High Street portfolio of interest bearing and charge inducing proto-bank accounts.
Is the Church of England the right organisation to carry forward such a programme? Even at this early stage of the discussion there is evidence of conflict between stated social and community aims and the embrace of profit drivers in the sector market place.
Are church communities ideally placed, even at Diocesan level, to push forward a comprehensive marketing plan, embracing the web and new media to facilitate this transformative experience for the credit union sector? How will the injection of faith interests affect the credit union landscape and the make up of any proposed new services?
Credit unions presently rely on grants in aid from a variety of sources, and are not perceived by mainstream financial institutions as sustainable. Is there a Social Finance initiative to be created to help credit unions play an important role in services their customers?
Affordable credit, simple bank accounts with the creation of mechanisms that allow customers to ‘micro-save’ regularly for their bills, with specific local knowledge deployed by branches to enable a bill payments service for customers too – these are some of the additional, innovative services that could be deployed to give the sector additional vitality. All concepts embraced by the DWP report.
Maintaining the local option would be acceptable to the existing network, even though the notion of being a ‘poor person’ lender was seen as a negative, the existing credit unions do have customers who are and make loans to, higher income members of the union network. This cohort of users could be expanded.
Should credit unions, building on this user group, be marketed perhaps as the national key ‘social lender’ of choice, with the Social Finance sector imaginatively supporting local or regional networks of credit unions in line with the DWP report.
Much change is on the way, both from the church, social finance sector and central government we suspect. Our sector will have its role to play we are sure.
