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Capitalism with a conscience

A new generation of philanthropists is making the world a better place, and making money too. But think carefully before you embark on a social enterprise.
Social enterprise - a sensible and ethical way to invest?
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©Melissa Bailey

At a time when the world is still feeling the effects of the worst financial crisis since the 1930s and banker bashing is a global pastime, communities and policymakers are seeking ways to carve out a better future.

The backlash that has followed the financial crisis has been accompanied by a heightened sense of social injustice, as the less fortunate paid the high price of what was perceived in some quarters to be a very costly mess created by the banks. Through the burgeoning world of social enterprise, the next generation of social entrepreneurs and investors is contributing to that change, combining a hunger for returns with a desire to do something for the greater good.

“I think that wealth inequality is a huge issue and banks are being bashed and perhaps quite rightly,” says James Hurrell, the regional director in Europe for Nexus, an international network of more than 1,000 young philanthropists and social entrepreneurs who work to increase and improve philanthropy and so-called “impact investing”.

“What I find really surprising is that a lot of people in our network come from banking families and they think that the way banks have been behaving is atrocious. People in our network are incredibly uncomfortable with the idea of doing business in a way that exploits.”

And it is not just the banks that have received a hammering lately. In the UK the likes of Starbucks, Amazon and Google have been attacked for minimising their tax bills. Against this backdrop, social entrepreneurialism is a growing marketplace and is likely to continue to appeal both to high net worth individuals, and to companies and sectors keen to show that they are willing to contribute to a more sustainable social and environmental future.

Social investment
In the UK, the City of London’s local authority and promoter of the financial district says it is “putting our money where our mouth is”, with the creation of a £20 million (€23.6 million) social investment fund. “Social investment considers the longer-term social impact of an investment alongside its financial risks and returns and we are working hard to cement the City of London as a global centre for social investment,” says Mark Boleat, chairman of policy and resources at the City of London Corporation.

The fund was established last year and has committed £500,000 to the Real Lettings Property fund, which provides accommodation for homeless people. It has also invested £318,000 in the Small Enterprise Impact Investing fund, managed by Oxfam and the Swiss microfinance group Symbiotics.

There are plenty of examples of huge global companies doing an increasing amount for social good. The Ikea Foundation is focused on creating lasting change in developing countries, through long-term programmes that address fundamental needs among children. In 2012 it donated €82 million and supported 20 partners with grants benefiting children in 28 countries. Pierre Omidyar, the founder of eBay and a well-known philanthropist, has together with his wife committed hundreds of millions of dollars to hundreds of causes through individual gifts and the creation of organisations. Unilever, the global consumer goods giant, has a stated aim of improving hygiene, sanitation and nutrition and helping more than a billion people through its foundation. It partners with Oxfam, Save the Children and Unicef among others.

Generating returns
But there are also an increasing number of individuals who are seeking out opportunities for impact investing. This falls between philanthropy, which is purely about charitable donations, and traditional investment, which is about generating financial returns.

Founded in 2011 on the back of a small gathering of like-minded people at the White House, Nexus provides a forum and safe space for debate, inspiration and practical support for social entrepreneurs and the next generation of young, wealthy investors.

Such networks allow peers to get together and collaborate without creating a sense of “otherness”. While young members of some of the world’s wealthiest families are involved in some of these networks, Nexus aims to take away some of the pressures by operating a first-name only policy on name badges at events.

According to research, almost $40 trillion (€30.4 trillion) will transfer from older to younger generations by 2050 globally. Impact investment is the perfect option for wealthy individuals who want to make a return but also have a social conscience, according to Eveline Maas, who advises next gens for ABN Amro’s private wealth management arm.

“From an investment point of view it’s about making a positive impact in the world while making a return. It’s not philanthropy, which is just about giving donations. At the moment it’s an emerging stream of investment. It is a small area, but it’s growing and complex.”

She says that while this movement really began in the San Francisco Bay area, a hotbed for young entrepreneurial and creative talent, it is increasingly penetrating the general consumer and individual psyche. While consumers become more aware of where the food they eat is sourced from, or how sustainable the energy they use is, so too might they become more conscious of where they are putting their money.

“You may want to align your investment and consumer habits. It’s a logical question,” she says.

And while impact investment is more established in the US and Europe, there is also huge potential in developing countries, where fast growing economies are driving a new generation of wealthy individuals and companies. Nexus youth summits in the US and Europe now have equivalents in China and Brazil.

“There is a huge transfer of wealth happening globally. In developing economies – China, Brazil, India – new wealth is being created at a very fast rate and by younger generations,” says Hurrell, who founded his first charity aged 17. “There is a real opportunity to show how wealth can be used and how one has a responsibility to use wealth for the greater good. Obviously we’re living in a much more interdependent and interconnected world.”

Social entrepreneurs also need practical help that goes beyond funding, says Joni O’Sullivan, a business connector in London on secondment from Lloyds Banking Group to Business in the Community. “They not only need funding to get their enterprise off the ground but support in the form of mentoring, advice and other practical business support,” she says.

Some of the most useful help can come from taking expertise built up in a specific area and offering it to a budding social entrepreneur. “A lot of [next generation wealth holders] come with things that they are passionate about – someone recently sold a luxury travel company for just under £100 million and he’s thinking about how he can use his existing expertise to make a difference. It happens in all sorts of ways but I think really our mission is to inspire greater generosity and more strategic giving,” says Hurrell. “The best investments are where people don’t just give money, but also want to be involved in giving time and expertise too.”

Back to basics
From the social entrepreneurial point of view, starting with the basics is key to a project, according to Tom Ravenscroft, founder and managing director of Enabling Enterprise, which was created to ensure that students leave school equipped with sufficient enterprise skills, experiences of the world, and aspirations to succeed. Complexity can come later. He says: “The most crucial thing is to get started. I hear so many people raving about the social enterprises that they are going to start, and so few of them really get started because there’s something that hasn’t lined up – perhaps funding, or a policy that needs changing, or a crucial moment in their current job, or because they haven’t been on enough courses.”

Enabling Enterprise began as an idea when Ravenscroft was a business studies teacher in Hackney, in east London. He felt the course was not sufficiently engaging and that students were leaving with limited experience of the world of work, and a lack of skills that would be useful in the workplace. “When EE started there was no grand plan. In our first year we only turned over about £13,000 and I had a full-time job for most of that time. But just starting, refining and learning was enough to build off,” he says.

EE now partners with 25 leading businesses including IBM and PwC, has a team of 10, and will this year work with more than 20,000 students after starting out with just one class four years ago. Since its creation, EE has attracted external funding of around £325,000. “The crucial thing is that this funding has always been treated as investment, not income – so used to develop new things, not to just keep going with what we’ve got,” he says.

Ravenscroft says that establishing a support network is vital for social entrepreneurs, to offset the isolation of setting up a venture. He took part in the Teach First teacher training programme, and received support from the School for Social Entrepreneurs.

Getting an enterprise off the ground is not an easy process, and despite all the positives, investing in this area also has its drawbacks. There are few quick wins, for starters. It is still a relatively young area where the risks involved are not fully understood. “The jury is still out on pricing the risk. It is not easy or clear yet so the returns are not totally commensurate with the risk. Lack of knowledge can be an issue but we’re getting closer to understanding the risk profiles,” says Katie Hill, social investment adviser to the City of London Corporation.

Judging which projects have wings and will be financially sustainable and able to scale up is another challenge. You are typically looking at longer term returns and a lower rate of return, so making an impact investment is a big commitment.

“It is not that easy to just put money into impact investment because it is very high risk if your perspective is from financial return point of view,” explains ABN Amro’s Eveline Maas. “People require a new way of thinking. If you want to make quick returns you shouldn’t go into this area. You go into this area to make a difference.”

Undoubtedly though, as the area grows, it will become increasingly mainstream. “I think it is a very exciting area and potentially a way of satisfying both the needs and aspirations of communities, investors, investees, individuals and governments,” says Hill. “There is potential for this to compete with the mainstream and open up areas that haven’t yet been serviced. The focus needs to remain on making a real identifiable social benefit.”

It is an evolving area, and Nexus is starting to explore a range of possibilities for the future, including the creation of its own investment fund. What is clear is that there is a huge range of possibility in this burgeoning field, with a growing number of enterprises in which to invest.

But despite a rising awareness and demand for social investment, and the possibility that it will become a more mainstream investment, there is no danger of too much investment flooding into the sector any time soon, according to Hurrell. “I was asked recently whether impact investment might become the next big bubble. A bubble is when there is more money than there is opportunity, and at the moment there are more investable opportunities than there is money,” he says.

A global economy which remains in the grips of a financial crisis continues to put the spotlight on the social challenges that need to be tackled, not least the consequences of high unemployment and low growth. This “new normal”, as many economists now refer to it, is likely to put even greater emphasis on the need for social investment.

Five things to think about if you’re considering impact investment
1: Work out whether you really want to become an impact investor, or whether philanthropy or mainstream investment might better meet your objectives. Join a network that enables you to get advice, debate ideas and build collaboration among peers in a “safe space”.

2: When exploring projects or sectors in which to invest, consider selecting those in which you have experience yourself. You might be able to offer crucial advice and support. Social entrepreneurs often need practical business help, and you might have a lot more to offer than simply writing a cheque.

3: Make sure you understand roughly what the long-term benefits of a project will actually be. Is this truly a social enterprise? There will be a lot of ideas out there and some much better than others. And is this a project that lends itself to scaling up and growth?

4: Be prepared to be in it for the long-haul. Impact investments typically have longer term and lower returns compared with mainstream investments. Patience and perseverance will be required. Is it investment-ready? You might identify a project that is doing amazing things, but is not yet ready to receive investment. It might be that it first needs philanthropic money to get started.

5: There will be a lot of unknowns. It is impossible to predict and difficult to measure the precise extent of a social return or environmental impact. The financial risk will be greater compared with traditional investment, the start-up costs higher, and the due diligence process complex.  

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