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Social Finance: The Case for Helping the Least Needy

Rod Schwartz
Rod Schwartz, posted on 22.01.13

Blog comments5 comments


Conversations with investors, particularly those from a philanthropic background, are often focused on the desire to help those requiring substantial assistance. The argument goes something like this: "We cannot use our resources to assist those already well on the way to success, better to focus on those really needing our assistance."

This argument has a certain logic to it, and those with a strong social orientation, in particular those representing charitable foundations, may feel legally or morally compelled to act this way. A related argument frequently surfaces when foundation investors are asked to participate in structured financings, and assume the riskiest and least remunerative positions. On occasions they are asked to assume the "first loss", or take a "capped return", or sometimes a combination of the two. A sense of indignation emerges that their capital is being exploited so that those with a market return requirement can profit from social investment transactions they would otherwise not participate in.

I can surely see the point, but would like to suggest a different perspective, one that is based predominantly on the idea of social impact maximisation. There are times when large financial sums are required and these can only be made available through larger structured transactions - these necessitate access to mainstream players (banks, for example). By accepting greater risk or lower return, or both, foundation capital can bring in far larger sums than would otherwise be feasible, or are available in the social investment sector. Society's needs are so great that even with the £600+ million coming from Big Society Capital, far more is needed. As mainstream capital still seeks market returns, only social capital or government subsidy can make such deals happen.

An unwillingness to do so just because mainstream investors get their return is akin to "cutting off one's nose to spite one's face". These foundations would willingly offer grants where 100% loss of funding is assured. But by using their capital in structured transactions sometimes far more social impact can be generated, AND they might see some return. Not to do so just because other investors (with very different criteria, beneficiaries and rules) might do well seems odd and reduces social impact generated.

Similarly, by shunning those social enterprises or projects which are close to viable, in favour of the more hopeless, they are reducing both their return and social impact. Moreover, they are undermining the probability of success of those social enterprises which are just about sustainable, in favour of those which have a very long road still to travel. And these "nearly there" social enterprises are, by definition, not yet there. If they fail just near the finish line it is deeply tragic and undermines all the hard work and capital invested by foundations and others which got these social enterprises "nearly there" in the first place.

To get the most out of our money, a critical discipline in today's capital-starved times, and generate the most social impact, we need to start with the least needy and work our way backwards. This may seem perverse, but for those who care about substance over form, and making a substantial impact over a huge gesture, it is essential.


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5 comments so far.


Blog comments Robbie Davison, 28.01.13, 21:16

It is hard to respond to Rod's thoughts without feeling anxious and uncomfortable about his stance. His last paragraph jumps out as typical and wrong of the social finance sector but I will get to that in a moment. Structural social impact as Rod calls it should be the bastion of the public sector or lets face it the cash rich private sector who can afford to provide these services without the investment of social financiers and who are being given the public sector on a plate. Its a falsehood to believe that social enterprises will step into this space with any sort of scale or force but pretending they will allows some of the current crop of social financiers to distort the meaning of social enterprise and pretend that their money is being placed in the 'right place' - this is just not the case. And Rod's position typifies this approach. Social enterprise was never envisaged to become simply a replacement for what is - doing it cheaper - it was always to be about treating market failure and treating need. Now however the redefintion is ongoing as Rod and others stick to justifying why their money should be used for safe bets - playing their guaranteed return game - it is a dissapointing argument that lacks real merit in these austere times and I would welcome the chance to debate this sometime in the future... To finish, back to that last papragraph - "working your way backwards" towards need after first servicing the easier higher returns stuff may well keep Clearly So in the finance game for a good while longer but I confidently predict that by the time Rod's plan comes to fruition, need will have grown exponentially and there will be few if any real social enterprises left to fund. Whats sad about all of this is that some of us have alrernative ideas and plans that can merge social finance to solutions that are able to generare returns - but right now social finance seems to be too busy naval gazing, wanting to avoid any sort of contructive dialogue - pushing in the same direction of we have got if right, social enterprise have got it wrong.Oh well, as Harry Hill once said to a heckler, "I've got a hot chicken in the oven."


Blog comments Paul Halfpenny, 29.01.13, 22:20

You know, I'm getting increasingly uneasy about the way conversations are going around how best to grow and develop the social investment industry. First, let's never lose sight of why these funds and this industry was first mooted - to provide appropriate finance for social enterprises. Social enterprises represented an alternative to both charities - with no meaningful connection between their fundraising function and their productivity - and the public sector, cumbersome and hidebound by bureacracy and targets. Now it seems like we're building a financial sector which is so risk averse that the only places it'll be willing to invest are, umm, large charities and local authorities (and the odd NHS spin out). Second, there seems to be a larger and larger number of people comong to work in the social investment industry - from mainstream finance. The new industry is being remade in the image of the old - which is exactly the set of drivers and circumstances we had for the establishment of an alternative, social , investment marketplace in the first place. Now we're being told - surprise - that the sort of social investing we want is - risky!. Really? We could have told you that. The purpose of this new industry is not to create jobs for mainstream financiers and to create a mirror image of the banks and lenders we had ten years ago who told us that what we wanted to do was risky and less likely to be sustainable. The purpose of this new industry is to find ways to get investment to social businesses. And the method for this is the same method we used when we began developing social enterprise itself - we took business techniques, philosophies and processes and remade them for our purposes. The same isn't happening with social investment - and I can't help but wonder how much it's costing us to service a growing industry with a shrinking number of deals, which has the apporach to risk of an institutional pension investor, rather than the approach of a social VC. Bottom line is, it's our money. We lobbied for specialist social investment. The job of the industry is to get it to social entrepreneurs. The wrong answer at the moment is "we can't give it to you because you're not conforming to mainstream standards of sustainability". The right answer is - "let's talk abot how we structire the deals". and as for the private sector taking a "last in, first out" approach as they did with the likes of Bridges back in the day - syndicate the risks and the returns and give no special pleading to returns driven investors. If it's a choice between using our industries money to finance our industries vision, but not being able to attract every Tom Dick and Quentin looking to maximise returns, I say lets be more selective.


Blog comments Jeff Mowatt, 02.02.13, 18:45

Rod, As you know from conversations on Social Edge , my colleague Terry was an early adopter of social purpose business and an advocate for a needs based strategy. He'd been able to source a sucessful microenterprise development initiative in Russia and a tentative agreement for US funding for s social enterprise development project in Crimea. His position was stated in an article written just months before his death "Hallman concludes that social business and social enterprise must be done by working backwards, from the problem: identify the worst social conditions in any given location, then analyze why the problem(s) exist. This method will always reveal all factors and barriers. Only then can the problem be understood, and then possibly fixed. But, he notes, barriers are often found in various organizations who are supposed to be trying to fix the problem, but have vested interests in direct conflict with achieving actual solutions." He was alluding to those whose vested economic interest which were in conflict with our focus of relieving children from neglect in state care. A year earlier, not having your advantage of media prominence in the UK , he'd spoken with Axion news in Canada about funding the social business model, warning of a similar scenario to the corporate raiders in the US. It said: "Hallman is currently investigating the setup of a multi-million dollar fund offering split financial ROI if needed, that is, a portion to investor(s) and the remainder to P-CED. The funds will be directed to concluding a project in the Ukraine which involves funding the training of residents to develop social businesses. Included in this work is supporting children who have disabilities, many of whom have been left to die in secretive locations. P-CED is helping to move these children to safety and give them access to modern healthcare." http://www.axiomnews.ca/node/966 We were kept very much at arms length when corporate sponsored agencies arrived on the scene that same year. we applied to join them and were disregarded. Taking this issue up with my MP reveals that qualification for partnership in the USAID/British Council initiative depends on the ability to make a financial contribution. In other words, corporate partners only leaving us hanging out to dry with dire consequences for those he identified: "Those who suffer most, and those in greatest need, must be helped first — not secondarily, along the way or by the way. “.


Blog comments Isobel Spencer, 17.02.13, 15:57

Rod, I think you have two separate arguments here. One (the heart of paras 3 and 4) claims that ‘foundation capital’ should be used to bring in ‘mainstream capital’, thereby leveraging scarce resources to increase social impact. (Sounds sensible.) Your second argument suggests that investment decisions should be made on the basis of maximising social impact. That is an easy statement to agree with. For you, this equates to prioritising support for ‘close to viable’ social enterprises over those that are ‘more hopeless’ – and you say this would maximise investors’ return AND their social impact. It is certainly true that financial return is maximised by supporting investable or near-investable organisations – but less obvious that this also maximises social impact Surely you need to know 'how much' social impact is delivered by each organisation you support, compared with that delivered by those you choose not to help. Perhaps more intensive support for two ‘more needy’ organisations would generate more social impact than helping 20 ‘less needy’ organisations. It is not clear to me that the approach you advocate would in itself maximise social impact, even if it would maximise financial returns.


Blog comments Rodney Schwartz, 23.02.13, 13:21

Dear Robbie, Paul, Jeff and Isobel (and also David Floyd, who has blogged a reply) I am very grateful for your comments and the fact that we are collectively having a genuine debate (rather than a pantomime) about essential issues in our sector. I agree with much of what you say, disagree with other bits, but welcome your challenges. I would very much enjoy the opportunity to reply, but think this is a much bigger debate and would welcome any ideas you have about how perhaps to engage a wider forum. Otherwise, I will do something here on the ClearlySo blog Kind regards, rod


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