9% loss on a social investment portfolio—good or bad?
11 June 2015
Last week a report was published which got all of us here at NPC talking. It’s a first attempt to use data to see what is happening in the social investment market from an investor’s perspective and is tremendously important for the evolution of social investment.
Social investment is the term for loan-style finance for non-profits—charities, social enterprises and some ‘profits for purpose’. Of course, charities and others have, for a long time, occasionally accessed loan capital through banks. However, social investment uses repayable finance to achieve a social as well as a financial return.
The real movement to build a market in social finance began around the turn of the millennium with the government setting up The Social Investment Taskforce. Since then, in fits and starts—and sometimes with a sprint—we have been advancing. Social investment in the UK is now a big part of the government agenda, supported by grants and initiatives and the creation of Big Society Capital, the social investment wholesaler.
All this is lots of fun, but the question is—does it work? Policymakers need to know this, otherwise we may be pursuing something that does little to advance the cause of civilisation (or at least its social goals). Charities want to know if they should spend their precious time trying to obtain social investment. And above all, investors want to understand the risks involved. What sort of a return will they make if they lend to a not-for-profit organisation in this way?
The new study by EngagedX, commissioned by the Social Investment Research Council and the Royal Bank of Scotland, looks at data from the early 2000s from three major lenders, in order to get a fix on what sort of returns have been achieved. It can’t have been an easy task—the data set is by no means comprehensive, and the funds set up in the early days were often deliberately looking for high risk investments and often included grant funding as well. The paper acknowledges that the extra costs that social investment often requires—transaction costs and the costs in actively managing the deals—are not included. So results are only indicative at this stage.
But the bull point of the study is that ‘the total financial return is negative 9.2%’. That means you lose almost one in ten of the pounds you lend over the whole period. Or to put it another, more positive way: you almost get your capital back, but not quite. Of course if you give to charity via a grant you ‘lose’ all the money, but social investment is not usually judged against that criteria, but against other investments. So some will see this number and think it’s not very good. Not as good as putting your money into a unit trust, although probably better than sticking it in a current account or many savings accounts.
The paper tries to compare the findings to other places where government backs risky ventures—like the Enterprise Finance Guarantee—and finds the number of loans that defaulted to be similar. It therefore concludes that this is a decent result, not least in a new market.
In some ways, that seems fair enough. But there is a gaping hole both in the paper and in the logic. A loss of 9% would be pretty good if the investments were getting a terrific social impact in return—especially if it was something that couldn’t be achieved via pure grant funding. But if the loss was 9% and the social impact wasn’t great, I for one would not be shouting about it from the rooftops.
Financial and social return
This highlights surely the great lacuna in the social investment world at present. The social impact of these investments are not being seriously measured, and precious little attempts are made to measure them in comparable ways so we can gain the insight to make the comparisons I am talking about.
Of course it’s not easy—and we may never be able to get there. But if the financial return is not to be the only metric that matters, and for us to understand whether good social impact is being created with these investments, we need to do a lot better. It is welcome that the basic financial data essential for analysis is finally available. Data can help us test which bits of the market are the financially riskiest, and subsequently where we might demand the most social impact in return. But actually getting towards measuring that social impact is the real missing link.
Going forward, surely we should only consider someone a ‘social investor’ if they are transparent not only about the financial returns, but also the social returns. That is the way to build this market and to ensure it really achieves the social impact it has been established to deliver.