There is considerable debate in the social investing field about impact, and what makes an investment “social” This leads to the grand debate about whether or not there is a tradeoff between social and financial returns in impact investing.
ClearlySo published a report last week (http://www.clearlyso.com/) that highlights a critical distinction being made by investors regarding tradeoff. “Social investment also focuses on the balance and possible trade-off between social return and financial return. Another point of view is that all impact investment has a social component and therefore the distinction is false.”
Therefore, there is a group of investors who believe that there is a tradeoff: they seek financial returns, yet understand that any increase in focus on financial returns may reflect a sacrifice in mission, and a tradeoff in social impact. There is another camp of investors who believe there is no tradeoff: they may seek out an industry that is inherently social (such as healthcare or education) or environmental (such as clean technology), and then maximize financial returns in that industry. This latter approach seems to be the one taken of LeapFrog (insurance products to developing world), and RF Chandlers’ social venture fund.
Investors who believe there is no trade-off in social and financial returns, experience certain clarity in strategy. They pre-select industries that are inherently social, then solely maximize financial returns. These investors can operate using traditional investment methods, avoiding the confusion of management team of how to build a business to scale, whilst also maximizing social and environmental returns. Secondly, choosing certain sectors can further reduce “noise;” for instance, investing in education and healthcare may reduce some of the ethical dilemma’s prevalent in the financial services industry. The ethical dilemmas have been highlighted recently in India where a subset of institutions are debatably taking “unfair” advantage of the unregulated microfinance sector to earn profits off the back of the poor who are over-leveraging themselves. Third, these investors who believe in no tradeoff tend to choose to target the emerging poor, excluding the marginalized and destitute (who might be better served by traditional philanthropy and aid). Do those who believe in a tradeoff tend to focus on the marginalized and destitute?
RF Chandlers approach has been to run their investments like any for-profit business, not confusing management with a focus on social. The investment fund evaluates the industry, embarks upon it for the social value, incubates an idea, and brings in professional management with the ability to scale.
There is certainly a large role for social incubation in this space. My own impression, and certainly one shared by many, has led me to believe that the paint point is not the capital, but the capital absorption ability of enterprises (“the pipeline”). Two SOCAP conferences deep, and the message is the same: it tends to be the same capital chasing the same deals. The supply of “investable” deals has been limiting for investors, and represents a shortage that cannot be addressed by building out an innovative fund scheme or social capital markets. However, upon arrival in Asia, it is clear that the supply of social enterprises is indeed growing. And intermediaries such as incubators will have a very clear role to play to build out this pipeline.
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