Investing in businesses with a social purpose

By Andrew Robinson MBE
Head of Community Development Banking
NatWest & The Royal Bank of Scotland

The UK has had an unprecedented period of economic growth over the past 10-to-15 years. For the majority of people this has given rise to greater prosperity and new opportunities.

So it is an uncomfortable reality to discover that our poorest communities have continued to get poorer -- measured by wealth, unemployment and income levels. This is in part because they cannot attract the sort of investment required to support the growth of business and social enterprise. Don't get me wrong - lots of money is being spent precisely because these are areas characterised by crumbling infrastructure, high unemployment and low incomes. Yet, the vicious circle of disinvestment is not being checked.

The vast majority of the money in circulation in these areas tends to come from central and local government - welfare, topped-up (on rare occasions) with a little philanthropy. This money is important, but it is allocated on the basis of meeting current need, rather than in ways that would best help people living in these areas to become more prosperous; and a large portion of it is spent outside the communities themselves.

In such circumstances mainstream businesses will not invest, so property values, morale and the level of hope all fall. Public funding in effect ends up compensating people for being poor, rather than helping them become more prosperous. Charity simply dulls the pain.

Twelve years ago, partnership working between the public, private and voluntary sectors was a new concept introduced by the Conservative Government. For good and logical reasons, it was introduced as a necessary prerequisite to the allocation of regeneration funding. As with any new thing, it was opposed by some initially. Today it is still misunderstood by others. Yet, over time, most have become used to a new and better way of working: each sector supposedly playing to their strengths. But it hasn't been enough to achieve the subsequent New Labour Government's vision of economic prosperity and social justice.

Anyone looking at a map of the 1,997 'most disadvantaged' wards will see that poverty persists in the same places as it did 10, 20, and 30 years ago - and the problems in these areas have morphed to a level of complexity that demands further innovation.

Experience and much research, in Britain, Europe and the United States, have shown that, even in the most hard-pressed communities, conditions exist to make regeneration feasible. There is no shortage of talented individuals with dreams for a better life. However, they usually lack the confidence, experience, support and capital to develop them.

Most of my work in the UK over the past 12 years has involved experimenting with new, hybrid structures that might provide more effective and sustainable solutions. This work has introduced me to some great people who have more than a 'duty of care' for those on the margins of society. They care enough to persist in finding unconventional solutions for those who stand little chance of support from conventional institutions for a variety of reasons.

Innovations in social investment

One such innovation is the community development finance institution (CDFIs). CDFIs encompass a wide range of organisations serving different groups with different lending models. Fundamentally, they connect the economically disadvantaged with the mainstream, challenging the assumption that more grants and more benefits will break the cycle of under-investment.

The problem is that the sector is not of the scale needed to make a sufficiently large impact on our most under-invested communities. If CDFIs could play a larger role in rebuilding the economic base of these communities, mainstream investment will again become available and market forces will deliver finance to support the ideas and energy of entrepreneurs. This is a political and financial challenge.

Another innovation that offers some hope is the social enterprise sector.

Adam Smith wrote that conducting a business for public good "is an affectation, indeed, not very common among merchants." But there are an increasing number of for-profit, entrepreneurial organisations explicitly designed to serve a social purpose; yet their activity is virtually invisible in the UK.

Social enterprises should not be confused with other organisations that have a social benefit. Examples include the following:

• Straightforward business ventures operating within a larger non-profit structure, whose primary purpose is to generate independent income streams to fund the mission of their sponsor. While similar in their objectives and operations to for-profit social businesses, they do not have the same capital market and profit pressures. They are also free to use philanthropic support to subsidise their start-up and on-going operations.

• Socially responsible businesses, which seek to achieve commercial success in ways that respect ethical values, people, communities and the environment. While these might often provide resources to and actively engage with public or non-profit organisations to support a specific social cause, unlike for-profit social businesses, their primary goal is to create economic value.

• Purely profit-motivated firms diversifying into the social sector, simply in search of profit. Such business do not place an inherent value on social impact.

Social enterprises are different. They challenge the accepted ways of doing things - their primary purpose is social. It's not that they set out to be awkward, but having discovered a better way, they find it hard to accept the status quo. As the chief executive of one of the UK's fastest growing social enterprises said, "There is more to us than you know, and once you have seen it and experienced it, you will never settle for anything less."

However, this characteristic makes social enterprises problematic for those agencies and organisations that should be providing advice, support and finance to help them meet their objectives. Conventional businesses -- those trading to make money for their owners and shareholders -- broadly obtain what they need. Social enterprises -- those in the business of, for example, regenerating a community blighted by poverty, or providing employment for those who would normally be considered unable to work, or delivering a much needed local public service - don't.

Moving forward

As with CDFIs, the social enterprise sector is beginning to develop a track record of success. But both face a number of the same challenges, and will not be able to make any significant impact until they are addressed. This will require:

1. Money that is free from the (direct) constraints of the capital markets or governmental regulations to support this innovation; and
2. Confident, purposeful leadership.
   

Things are changing. The concept of harnessing the power of the market to achieve social, economic and environmental change is past proof-of-concept stage. Now there is an opportunity for a new generation of philanthropists and social investors to engage in quite a different way to the current 'giving something back' generation of philanthropists (see Table 1). This trend, along with the rise of the 'activist' consumer, the emergence of new organisational forms (such as the Community Interest Company), and some more favourable government policy are all creating a more fertile ground to really make a difference.

With so many people living powerless and poor not so far from us, it's got to happen. But it will require the on-going transformation of the structures and practices that have provided and maintained our own affluent comfort.

Table 1

Opportunities for individual investors

1. Make yourself aware of these high social impact investment opportunities by contacting the Community Development Finance Association and the UK Social Enterprise Coalition.
2. Find out how you, or your company or business, could take advantage of the new Community Investment Tax Relief.
3. Join the RBS Group/Coutts Social Investment innovation working group.

For further information on any of the above, please contact the following organisations:

Community Development Finance Association
Unit 101, Hatton Square Business Centre
16/16a Baldwin Gardens
London EC1N 7RJ
Tel: 0207 430 0222
www.cdfa.org.uk

UK Social Enterprise Coalition
54 Haymarket, London SW1Y 4RP
Tel: 020 796 84921
www.socialenterprise.org.uk

RBS Group Community Development Banking
3rd Floor, 2 Waterhouse Square, 138-142 Holborn
London EC1N 2TH
Tel: 0207 427 9139
andrew.robinson@natwest.com
www.rbs.co.uk

The Community Development Banking team at NatWest & The Royal Bank of Scotland works across RBS Group developing market-led programmes in places that have been considered as 'no-go' in the past, such as the UK's most disadvantaged communities or markets where conventional approaches generally do not work. This activity has given the bank a leading position in the voluntary, community and social enterprise sectors. We also have the largest market share of the small business market located in 5% most disadvantaged areas. Our primary motivation is neither philanthropic nor charitable. We believe that, by being a part of a process to reverse the historical trends of decline in disadvantaged communities, new stable markets will offer new business opportunities.