Social investment is not an asset class, it’s a mindset

If we want to truly change the world, we need to start thinking bigger; we need to start seeing social investment as something that is relevant to all of our financial activity; we need a new mindset.

“In today’s globalized world, too much emphasis is placed on economic success, measured in terms of material wealth…”

Social investment – investing private capital in organisations that create a direct, intended and measurable social impact while also generating a financial return – is a wonderful thing.  It appeals to both the commercially and philanthropically minded as in theory it can (and in practice often does) allow investors to have their cake and eat it, so to speak.  Whilst the concept seems at odds with the prevailing materialistic mentality of today’s society, there are few people who are not intrigued at the idea of “doing well whilst doing good”.

It’s hardly a new idea.  One can point to the great Quaker business leaders of the 1800s for their radical ideas on ‘good business’.  The US introduced Program-Related Investment in 1969 and the Community Reinvestment Act in 1977.  Professor Yunus began his work on microfinance in the mid-70s.  Even the recent market growth started over a decade ago, helped by a UK government initiative leading to innovations such as Social Impact Bonds and the world’s first Social Investment Bank.

 “.. What gets overlooked is that GDP and other economic activities are means to ultimate ends, not the ends themselves…”

And yet, despite all this work and the topic even making the agenda of this year’s G8 conference, the social investment market remains tiny in the grand scheme of things.  JPMorgan’s seminal 2010 report predicted social investment could be as large as $1 trillion over the next decade – barely 1% of global assets.  Even SRI/ESG investing is seen as a niche market by most institutional investors.  Up to 20% of global assets are said to be managed with “ESG considerations” although few would argue that this has led to a 20% improvement in global social or environmental impacts.

The simple reality is that financial return and short-term thinking continue to rule business and investment decisions.  Social investment and social entrepreneurship are nice ideas best left to individuals with money to spare and a conscience.  But if 80% (at least) of our money doesn’t care about how it generates its return, we can hardly be surprised when problems arise.

“.. We need to redefine success in terms of the wellbeing that is generated by our activities and how this wellbeing is distributed across populations and generations…”

There is a story of an old man walking on a beach where the tide has gone out, leaving many starfish stranded and dying on the sand.  Every few steps the old man stops, bends down and throws a single starfish back into the water.  A young man watches for a while and then wanders over.  “You’re wasting your time!” he says.  “You’re missing most of the starfish and the tide will simply come back in again and leave more stranded.  You’re not making any difference.”  The old man smiles gently, picks up a starfish and throwing it back says “It made a difference to that one”.

Viewed in isolation, I see social investment somewhat like the old man.  Yes it will make a very significant difference to a few and for that the market is to be encouraged, nurtured and grown.  We must find more people willing to pick up more starfish, so the few become many.  We must develop more ideas focused on intervention, like Social Impact Bonds, to reduce the numbers washed up on to the beach in the first place.

But whilst the tides of global economic growth continue to surge with no care for those caught in the wash, many victims will continue to be left stranded.  We must therefore address this issue at the same time and for that I believe we need a new mindset.

“.. Such a redefinition can lead to new approaches toward achieving fair and sustainable prosperity.

So how do we change the tide?  By firstly realising that we can no longer separate business activity into either “commercial” or “social”, but that they need to become one and the same thing.  Businesses must rediscover what it means to be socially valuable in all that they do.  They need to factor in the true cost of their activities – including elements like environmental impact.  They need to strive to be of benefit to as many people as possible.  That is certainly not to say they should not also be profitable, but it will mean a change in the way things are done.

And we can achieve this by using finance as the key lever of change.  Put simply, as investors and consumers, you and I together can choose where to put our money to bring about these changes.

I have come to see my whole financial portfolio as a spectrum – from investments made primarily for the financial return through to pure grants.  The financially focused part of my portfolio needs to reflect my values just as much as the grants I might make and all the elements in between.  I want to understand the local and global effects of the companies I invest in and, more importantly, I want to invest in those that are creating opportunities for sustainable human flourishing around the world.  This is not an oxymoron.  It’s an opportunity to re-engineer business and for investors to use their capital to create a future worth having.

 “.. It can also uncover new opportunities for human cooperation.”

This is what I mean when I say Social Investment is not an asset class, it’s a mindset. 

I really don’t care about the semantics – call it whatever you will.  What I care about is seeing the behaviour of individuals and corporations change for the better. 

Will you change your mindset?

By Martin Rich, Director at Social Finance. This post was originally written for the Global Economic Symposium 

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