Social Investment – does definition really matter to potential beneficiaries?

Open almost any report on Social Investment, or fund website, and you’re likely to find words to the effect “what we mean by social investment is…”.  Despite a debate that has rumbled on for years, there’s still no single, agreed explanation, so it’s no wonder then that running alongside this commentary is the repeated message that charities and social enterprises “don’t know what social investment is”, particularly those at the smaller end of the sector.  This was recently reiterated in Localgiving’s Local Charity and Community Group Sustainability Report 2016.

I would argue though that while coming up with a form of words to describe social investment may be useful and important for those trying to develop or analyse the market or attract investees, it’s rather less relevant for potential applicants. Charities just need to know how it works and what it is (and isn’t) for.

Fundamentally, the two key considerations for trustees and social venture leaders when assessing whether taking external finance is a good option to meet their organisation’s needs are little different to those running any small or growing business:

1) Given our current and expected future cashflow needs and pressures of the organisation, is external investment the right type of finance for the proposed use?

2) If yes, who are the right investors for us and how can we convince them that we can use their cash well, and produce the returns (financial, social or a mix of the two) that they are looking for?

Where there are a wide range of possible explanations and outcomes, I think it can be helpful to start by narrowing them.  As such, looking at what social investment is not might be a helpful place to start answering the first question.

So, as a starting point I would say (social) investment is not:

a) Income – I’m often somewhat concerned by information provided in commentary and training programmes that suggests that investment can be considered alongside income streams such as grants, donations and trading income. While it can certainly bring in a sum of cash, it is fundamentally different in that it is repayable and continues to “belong” to the investor.

b) A quick fix – apart from the relatively low number of cases where an investment is merely bridging a gap until an expected lump sum is received, taking on investment is a longer term commitment. It will certainly require close control of cash flows, and may also bring with it increased external scrutiny and reporting requirements. Neither of these things is inherently bad and indeed can provide a relevant way of focusing minds on the sustainability and impact of an organisation, but they do require time, effort and good internal systems to do them well.

c) Suitable for all financing needs. While there are a variety of instances where investment is a viable and useful option, there are also many others where, even if forecasts suggest it is affordable and can meet a certain need, it may not be the best option. A recent report by IVAR on Small Charities and Social Investment suggests that around 50% of those interviewed sought investment to deal with a cash flow crisis and indicated that “charities appeared not to have considered a range of finance options”.

While the decision to take on investment (if offered) as a position of last resort is understandable, it  is undoubtedly not the ideal scenario.  The funding options available are closely defined by each individual set of circumstances, but ultimately investment is best taken on as one aspect of a solution defined by the organisation’s longer term strategic ambitions.

d) Not always high risk – it’s true enough, particularly when taking on a loan with a monthly repayment cycle over several years, that there is a degree of calculated risk involved, but this is at least one aspect of a cash flow forecast that is certain and finite. In any charity or social enterprise, those at the helm make decisions regularly about long term commitments to beneficiaries, funders and partners. With the right information, an investment decision becomes just one of them.

As noted above, I’ve seen many instances where taking on social investment has been at the centre of a positive transformational change in an organisation’s development, but there are also instances when it is not the optimal solution. But perhaps by considering not definitions but the implications and the full range of options available to them, charities and social enterprises can cut through the confusion and more confidently assess the most suitable financing solutions for them to support achievement of their social objectives.

Nikki Wilson is an Eastside Primetimers member (consultant). She also oversees our Local Sustainability Fund work