Let me begin with an aphorism of my own:



Or, if you like: a market that doesn’t learn from failure is doomed to repeat it.

Because successful market development depends on learning from failure.  Markets that work are about discovery.  And the richest form of discovery is from what has already been tried.  And for individual market participants learning from their own failures and from everyone else’s is the way to build market position and competitive advantage.

The social investment market and every participant in it thus each have privileged access to the best source of learning and competitive advantage that they could hope for – their own records of what has been tried, what succeeded and what failed – and why.  If they could but find the time and resources to access and analyse them.  (Some are and increasingly are trying to).

Yet failure is an awkward thing to get to grips with.  It suffers from a poor image – who wants to be associated with “failure”.  No-one wants to be endorsed on LinkedIn for a competence in failure.  Failure needs a decent brand consultant.

Failure also comes in different forms. Some failure is good failure, some is bad.  How do we tell the difference?

Here’s a suggested typology of social investment “failure”.

Each of course, in social investment, might apply either to social outcomes or to financial outcomes or to both.  Whether financial risk and return and social risk and return are correlated is a different topic again.  (Already below you will see that I am mixing up social and financial outcomes but conceivably they are not related at all – or they might be closely correlated or negatively correlated).

  1. NORMATIVE FAILURE – In-line-with-risk failure: I call this normative because it is pretty much what investment is supposed to be like. No return (financial or social) without risk.  At an individual investment level, as long as the agreed investment discipline for a firm was followed, it is hard to see the failure here save in the most mundane and merely factual way.  Entirely to be expected there is only a problem if at the portfolio level the learning steps aren’t taken cumulatively to understand risk and see if the failure performance cannot be improved over time.
  2. RISK ASSESSMENT FAILURE – Taking-on-more-risk- than-expected failure: real failure if either at a portfolio level the failure rate turns out higher than expected or at the investment level if an investee which appears to meet the criteria for expected successful investments nevertheless goes off the rails. Either already understood risk factors have been missed (process failure) or there are new risk factors which need to be understood (arguably not real failure but instead a learning opportunity and opportunity for epistemic gain) or risk was mispriced (process failure).
  3. RISK APPETITE FAILURE – Taking-on-inadequate-risk and thus not achieving the desired returns failure: Conversely not enough risk can be taken, new investee business models not tried out, the challenge of the new or the scaled or the rolled-out not seized. Not enough risk and either social outcomes will be disappointing or an opportunity cost of not investing capital for superior outcomes elsewhere will be realised.
  4. BUSINESS MODEL SELECTION – in-line with-business model failure: across a spectrum of possible social investment approaches and styles, different investment business models will be available that involve different risk profiles. Social investment is best understood as a pluralism of different investment styles and business models.  To compare (to take a crude example) the higher failure rate at a fund intent on supporting start-up stage social enterprises with one backing only scalable social enterprises with a track record and established contracts and to ascribe the presumably higher capital write-off rate at the former to “failure” would be to miss the point.
  5. PORTFOLIO FAILURE – Failure to learn: Whereas types1-4 are about individual investments (which might then be aggregated and used to classify a portfolio approach), this risk is all at the systemic portfolio level. The money has been got out of the door by the investor but not skillfully.  No value has been added over the process; the investor has not learnt and revised its investment judgements over the portfolio life.  The portfolio investment might be strategic in the sense that it adhered to the initial chosen area of focus or investment style but over time it has suffered from strategic drift as instead of learning how to achieve its investment aims it has simply ploughed on.  This is a failure of rationality – a means-end confusion.  (Taking rationality as the most efficient matching of appropriate means to ends.)  Rather than understanding the investment making process as a means to achieve and improve on the “end” of a target set of investment outcomes, the investment process (getting the money out there) has become the end in itself.

1-4 are all about expectations and the ability to baseline or benchmark expectations of success and failure – or carry out reliable risk analysis and risk pricing in other words, one of the holy grails of social investment.

Learning from failure – the “learning curve game” necessary to avoid failure type 5, can therefore be seen as a necessary “expectations game” and a “data game” dependent on continually crunching the data and learning the lessons from the cumulative investment process – to understand better and better the driving explanatory factors for success and failure.  If we do that we can set benchmarks for social investment and for different sub-sectors and business models of social investment.  Then we can tell (and have some warning of) when investment performance is tilting from a normative to-be-expected investment experience to something worse than expected with real failure – failure of analysis or of pricing or of investment readiness preparation.

Until we can understand and set benchmarks, we risk perpetually confusing expected “good” risk with “bad” risk.

And if we can’t set and explain benchmarks for expected risk (and expected returns, social and financial) we shouldn’t expect to attract in too much mainstream capital in a hurry save as de facto charity or blatant experimentation.

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Ben Bernanke, the former chairman of the US Federal Reserve, once argued that “the real service performed by the banking system is the differentiation between good and bad borrowers.”

This was brought to salience in the context of arguments in 2008 testing why on earth banks (as opposed to just their depositors) should be bailed out by tax payers and why there might be value in them as institutions worth preserving.  Bernanke’s comment was based on his academic studies of banking in the Great Depression in the 1930s.

In other words, banks have – or should have – a valuable ability to intermediate credit because of the valuable information that they gather, analyse and understand.  The banks are – or should be – in the best position to understand the explanatory factors driving success and failure of credits and of creditworthiness.

I would put that in different words again:

That banking (financial intermediation) is a data game.

And, more than that, that banking is a learning curve game.

That that is where the real value creation in financial intermediation is to be found.

Anyone can market to customers and invest in the customer acquisition costs.  Anyone can process credits.  Anyone with a halfway plausible manner can package them up and sell them on.

Real value add – and individual institutional competitive advantage as well – comes from crunching the data and understanding the real world factors driving success or failure of credits, from analysing and aggregating these empirically grounded characteristics of success and failure, from learning from them and moving up a self-built learning curve, and from keeping on top of them in a continual learning loop as the world develops and explanatory factors change.

It’s rather like the activity of investment.  The Warren Buffett-like true value to be created by the investment process lies in learning from experience and understanding the sources of investment gains and losses and thus understanding the elusive sources of alpha, in performance terms.

Merely making and processing investments and then riding the market return curve up and down adds not very much value (and actually subtracts value when that is all you are doing but when you are charging for alpha creation so that your fees exceed any sustainable relative performance gains).

So the lessons for social investment financial intermediaries (SIFIs) and anyone in social investment are obvious.

Data is king.  Analysing data on failures and successes should be more important than and closely integrated with carrying out new transactions.  Collecting and crunching data and then correlating it to different real world factors is the basis for learning from failure and from success.  Initial data analysis and then subsequent new investments will be experimental but as successive experiments are falsified or validated hard evidence will accumulate allowing a self-created learning curve to be climbed.  This will include social data and financial data to analyse social return success or failure and financial return success or failure – and in time whether social investment outcomes and financial outcomes from social investments are correlated or whether they are different investment phenomena driven by different explanatory factors and not existing on the same continuum.  If we collectively go up this learning curve we will learn to allocate social investment capital more efficiently, structure and price social investments better and construct a more robust investment case platform from which to market to and attract in more mainstream capital.

Now it may be that this is all happening already and is nothing more than a statement of the blindingly obvious.  Or it may be that history suggests that collecting data in structured usable form let alone actually analysing it is hard work and requires investment that is hard won only with difficulty from pressing day to day imperatives in a capital constrained market.  It may be that experience from other markets tells us that the siren song seduction of demonstrating activity and relevance by pressing on with transaction volumes is almost irresistible compared with slowing down to learn the lessons from what one has already done.

Transaction noise all too easily drowns out real learning outcomes.

And Ben Bernanke’s experience has another thing to tell us.  Recently, the Financial Times reported, he was turned down for a refinancing of his own mortgage.  As the FT said, apparently banks are unable to tell whether or not the former head of the world’s leading central bank who is able to charge $250,000 per speech is a good credit risk or a bad credit risk.  So much for banks and their super-duper credit scoring computer systems.

Have social investment financial intermediaries crunched their data any better?  How far up their learning curve are they?

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Data unlocks capital.

Data sets the risk and return expectations for providers of capital and thus provides the basis on which the provision of capital for social investment and impact investing can be scaled. Data gives a baseline for social investment and enables pricing for risk and return. Data shows how social investment and impact investing fits into modern portfolio construction compared with other investments and investment classes. Data signposts to front line organisations what sort of capital investments are available and on what terms. Data benchmarks success and investment readiness in social investment and impact investing – providing case studies and the aggregated investment characteristics of success. This helps new and existing investors to understand the drivers of social investment performance. Data identifies social investment gaps and opportunities – making the market more efficient and maximising public benefit. Data maps social investment. Data supports local as well as national knowledge of where social investment is actually being made and supports a social political economy of place and localism as well as national policy and investment strategy.

In short, data is what makes a market. More particularly, for the reasons given above, data makes an investment market.

All comparable emerging and frontier markets have developed their own data as a transformative and essential stage in their evolution. As public investment markets, they are only as good as their data.

The lack of readily available data is one of the biggest handicaps holding back the growth of the social investment and impact investing market. Lack of available data means potential new (and existing) investors cannot learn the lessons of investments and keeps the social investment market at the stage of private markets made up of a small number of small scale investors.
Expressed and presented in terms of and in a “language” that both the providers of capital and the front line organisations that need the capital can understand and feel at home with, data provides a bridge, a translation mechanism and a meeting place for both sides, enabling and encouraging the flow of capital. Data is as an effective broker.

This explains why data is the priority and core purpose of EngagedX – the social enterprise I am co-founder and Chairman of – in our mission of promoting social investment and impact investing to achieve our vision of an adequately capitalised social sector with the financial ability to maximise public benefit.

Rupert Evenett, September 2014

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10 Practical Lessons from Social Investment

Social investment is still an emerging market and developing practice. It’s an experimental market and everyone taking part in social investment learns lessons while doing so.  Without any stronger claim than that here are 10 practical lessons and reflections from involvement in social investment and the charity sector over the past 8 years:

  • Social investment depends on grant funding.  It doesn’t substitute for grants.  And this would be true even once social investment has grown to a much bigger size.  This is about developing the right theory of capital structure for social organisations not a comment on the stage of the market.  Social investment and grant funding do different jobs.  Grant funding provides an always necessary layer of permanent risk capital.  Grant funding also provides the speculative development funding for innovation – for finding new ways to address social issues or for continuing to improve social interventions, at a stage when there could be no guarantee of servicing investment capital.  Social investment provides the capital at a different risk stage for scaling up and rolling out interventions once grant funding has given them the financial space to prove themselves.  Social investment needs grant funding and should be additive to it, enabling both forms of funding to maximise their impact.
  • Social investment is an experiment. A really exciting one.  It is experimental in three ways.  It is an experiment as a market – to see how it can be developed as a market and what infrastructure and what support it needs to flourish.  It is experimental as an emerging set of practices – what due diligence is most effective, what structures work, how to manage a portfolio of social investments post-investment.  And it is an experiment about what sort of economy and what sort of society we all want – do we want a society in which entrepreneurs are as attracted to working out ways of solving social problems as to setting up businesses that make a lot of money.  Do we want a society in which social enterprise flourishes and there is a pluralism and a localism in social interventions.
  • The language and expectations of social investment are still being established.  What does successful social investment mean?  What returns, social and financial, is it reasonable to expect – and require?  What are the different options on the spectrum from social first investing to finance first?  What is the nature of the relationship between social organisations and their social investors?
  • Social investment shouldn’t mimic grants.  Social investment doesn’t have to be one-off funding for specific projects (and of course grants don’t either).  We can be innovative.  Social investment can be about core cost funding to give sustainability to an enterprise as a whole, it can be about allowing a charity or social enterprise to be properly strategic in its planning, it can accelerate investment, it can be about a fund as much as about a single organisation, it can address a social problem for individual organisations to draw down on, it can guarantee and underwrite as much as disburse cash.
  • Social investment is always investment in people.  The people driving a social organisation, its social entrepreneurs (whether or not it classes itself as a social enterprise) matter as much if not more than in commercial businesses.
  • All social investment is payment by results capital – not just the bonds that are self-designated as such.  The impact return is a key part of the return on the investment.  If a social organisation isn’t achieving real impact results, it won’t have a future long term – either because of commissioners or because of individual beneficiaries.  For many social investments, the relationship with the commissioners is one of the key bits of due diligence.
  • Don’t let your social investment fund become a property fund.  A concern for balance sheets leads too many social organisations to believe the one thing they must have is their own building.  Sometimes that’s right.  But for many, how much impact does a building have?
  • Much secured lending isn’t really secured in social investment.  Security is a feel good factor but too many properties in the social sector are in tertiary locations with limited alternative use.
  • All social investment is cash flow based investment.  Assets are nice (see above) but the real security comes from understanding the future cash flows of the social organisation and working with them to shape an investment that fits their cash flows with an appropriate margin of comfort.  These are “thin” organisations by and large without large balance sheets or reserves and current cash flow is king (unless an external guarantor or guaranteed future income like a legacy annuity flow can transform the investment picture).
  • Social investment is impact investing – investment in real impact.  Teaching grandmother to suck eggs but we need to understand the impact an investee organisation is targeting, the baseline for that impact and the “theory of change” – the real drivers that connect its activity with impact for the beneficiaries via the social and systemic context that the issue being addressed already exists in.
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Introducing “Implied Impact” and “Implied Social Return”: A Top-Down Contribution to Impact Assessment and Capital Pricing for Social Investment

“Implied Impact” or “Implied Social Return” is a top-down approach to impact assessment which sets a benchmark for impact or social return which is grounded in investor expectations and in comparisons between impact investments and mainstream financial markets.

It links impact investing and impact assessment to the wider prevailing framework of investor expectations of total return and perceptions of risk.  It is a contribution to the general debate on impact assessment and it is a complement to the different methodologies of bottom-up impact assessment which are being developed, not a substitute for them.

Its principal advantage is that it provides an explanatory framework for how market pricing of impact investments links to impact and provides a hurdle rate minimum required impact return for impact investments of different types and from different sectors.  However crudely, its advantage is that it provides a way in to looking at impact on a numerical and comparable basis across different activities and investment types.  It makes explicit the investor assumptions about impact that are built into priced impact investments so that a dialogue can be opened between top-down and bottom-up approaches to assessing impact.  One outcome, by making explicit and testing those implicit assumptions, should be investment pricing that over time better reflects those impact organisations who achieve most impact.  It should also help advance a risk-based pricing approach in impact investing / social investment.

What Is Implied Impact and How to Derive It

Implied Impact or Implied Social Return is derived from a comparison of the financial terms of impact investments with the financial terms of mainstream financial market investments of equivalent risk and maturity as a means of highlighting and quantifying the expected social return element of the expected total return of impact investing.  Such a comparison allows the observation of a yield spread (or more generally a total return spread) between the impact and mainstream investments.

With the assumption that the mainstream investment fully prices the risk, maturity and other shared financial characteristics of the two sets of investments, then the yield or pricing spread between the impact investment and the mainstream investment can be taken as a measure of the non-financial impact expected by investors from the impact investment.

To expand this by way of a purely illustrative example, consider an impact investment issue – a bond, say – issued by a front line social impact organisation to finance its continuing impact activities which the market (investors to whom the investment was marketed, taken together) has priced at a current 3% yield.  In other words, that is the price at which investors will buy the bond.  Looking at a commercial business of similar size and risk which has issued bonds or debt of similar maturity, let us say that the market price for those equivalent bonds / that equivalent debt is 6%.  Then investors are saying that the full total return they require in order to be compensated for that level of risk and maturity is 6%. Therefore in the case of the impact investment there is a spread of 3% (300 basis points) between the required financial return on the impact investment and the required financial return on the equivalent mainstream investment.

This spread could be seen as a pricing discount that the impact investment has “got away with” as a reward for being good (which would be a “impact investing as discount investment pricing” theory – but that seems unsatisfactory as it would be a reward for impact investments just for being good rather than contributing to a true blended total return market in which social return is accepted as a valid part of total return, which is the ambition of impact investing).  Or the spread can be seen as logically what it is (however crudely and imprecisely at first) which is an expression of investors’ priced-in required social return from the impact investment’s impact as a component of the investor required total (blended) return and which together with the priced financial yield brings the total return up to the investor required levels.

That spread of 300 basis points in this illustrative example is therefore the implied impact or implied social return and shows the role that impact or social return has in impact investing in forming part of the overall cost of capital framework.

This of course puts impact investing into familiar capital market pricing theory territory, adapting and applying a language of investor required and expected returns generating a market-imputed weighted average cost of capital across the impact organisation’s different sources of capital (including zero cost grant capital).

Significance of Implied Impact

This implied social return or implied impact is not the same thing as a “measurement” of impact of course – that is why it is not a substitute for bottom-up impact measurement.  In the illustrative example given here, 3% is not an estimate or forecast of what that impact organisation’s annualized impact actually is.  Instead it is a hurdle rate – an expression of the minimum impact or social return necessary to make that investment’s blended total return adequate to investors.

As a hurdle rate, it sets a challenge to the impact organisation and to bottom-up measurement of its impact, which leaves open three possibilities: (i) that actual impact falls short (meaning that the impact investment has been priced too generously to the impact organisation leaving investors with an insufficient total blended return); or (ii) that the actual impact is in line with the implied impact / implied social return (meaning that the impact investment pricing is about right); or (iii) that actual impact is greater than the implied impact either because performance is better than expected or because structurally the impact activity being undertaken has wider or deeper impact than originally expected.  That would mean in turn one of two things – either that that investment pricing is too generous to investors (suggesting that say the financial return element should be reduced) or that (as I suspect is very often the case) in blended return terms the impact investment is a premium return investment which should be highly attractive.

This is the dialogue with bottom-up impact assessment that the implied impact / implied social return framework opens up.

Now of course the actual impact is never going to be verified in practice with numerical precision.  Impact isn’t that sort of thing.  If it were, bottom-up impact measurement would already be off to the races and social returns and impact pricing would not need implied impact.  In practice it is the sort of complex, multi-factor and multi-good situation where (in the sense that John Kay uses it) “narrative reasoning” rather than “calculational reasoning” is appropriate.  (See John Kay, “A story can be more useful than maths”,  That’s fine.  The value of implied impact then is that it provides a numerical benchmark for an inherently un-numerical issue.

Testing the impact implied by investor expectations, as expressed in impact investment pricing, only has to be “about right” and subject to a reasonableness call.  “Given that sort of hurdle rate requirement for impact, does the impact narrative of this impact organisation, given its sector and type of beneficiary group, suggest that it is meeting investor expectations?”, is the sort of question that this approach poses.  And that seems quite do-able and useful.  (It is after all only what say the listed equity markets do in testing EPS (earnings per share) forecasts and EPS growth rates implied by share ratings (P/E ratios) – where there is a similar situation of apparent numerical precision actually being there to open up a narrative dialogue and set of narrative judgements about the likely longer term earnings prospects of a commercial business).

The usefulness of an implied impact / implied social return approach is that (just as, properly understood, with an EPS forecast or P/E rating from the mainstream equity markets or a credit rating from the mainstream credit markets) it prompts the right questions and starts the right dialogue.  If it is the beginning of an investment conclusion and not the definitive end to an investment conclusion which requires investment judgement, that is just the nature of investment at all times and in all markets.  But at least hurdle rate expectations and requirements are made more explicit and more comparable which is a step forward.

Testing the Assumptions behind Implied Impact: Testing the “Total Return Equivalence Hypothesis”

Implied Impact or Implied Social Return can be seen to rest upon what I call a “total return equivalence hypothesis” – which is the assumption that investments of similar risk and maturity should be priced alike in total return terms even if investments differ radically in their nature and even if the currency of return differs (by for example introducing social return as well as financial return).  Under this hypothesis a difference in total return pricing for investments of like maturity is always a debate about perceived risk.

One challenge to this hypothesis would be to argue that impact investing is just of a different nature altogether tro mainstream investments, requiring investors to accept a different (social) motivation altogether for investing which leads to discontinuous pricing terms between impact investments and other investments.  In other words, this is an argument that the social motivation undoubtedly demanded of investors if they are to participate in impact investing requires not just a mixed currency of returns but a different level of returns.

A second challenge would be a pragmatic one arguing that current pricing of impact investments is just too illiquid to support too much pricing theory and hypothesized “discovery” of investor expectations and requirements and that impact investing pricing should instead be explained as “the cheapest financial pricing that the market will clear at” in return for telling a nice impact story.

There are two things that can be said to these two challenges.

Practically, if the job for impact investing in its current phase is to attract wider deeper sources of capital so that more front-line impact organisations can be financed to do more, to improve more peoples’ life chances and to maximize their impact, then sooner or later impact investing has to adopt (and adapt) an investment language that mainstream investors (including private wealth investors) can relate to in their own terms.  Mainstream investors always have other investments which they can make and thus they have always an opportunity cost of capital for impact investing which, if it wants their capital, impact investing must address.  It might be a little early, but it is good to start making that journey.  Implied impact or implied social return helps provide a framework in which investor required returns can be addressed in blended return terms.

Secondly, in response to the pragmatic challenge, a hypothesis is only a hypothesis.  The claim behind this hypothesis, like any hypothesis, is not that it necessarily describes the world in all its complexity but that it is a useful too and reasonable working assumption that by holding lots of assumptions constant and examining one variable allows progress to be made – in this case progress in establishing a framework for pricing discovery for impact investing.  There can be discontinuity and illiquidity in the nature of impact investing and yet implied impact or implied social return can still be a useful working tool for suggesting the degree of linkage between mainstream investment pricing and impact investment pricing.

It also opens the door to a wider agenda of issues relevant to impact investing.

A Wider Agenda for Impact Investing Pricing

Being able, however crudely, to put numbers on impact investing’s social return element and thus on its total return, albeit from a top-down imputed perspective, and thus being able to benchmark impact investing against equivalent risk-and-return investment datum points in the total investible universe opens the way to allowing a number of subsequent developments.  These comprise a wider agenda for ongoing work in relation to impact investing pricing:

Relating impact investing pricing more explicitly to CAPM (Capital Asset Pricing Model) pricing theory

  1. Looking at assessing the beta of impact investing – and for different sectors and for different stages of investee development
  2. Developing a more fully grounded basis for risk-based pricing for impact investing (which has tended to fixed pricing or risk-insensitive pricing)
  3. Looking at the risk and at the beta not just of impact investing as a whole (on a total return basis) but of specifically the impact or social return element
  4. Contributing to models of portfolio management for impact investing, to take in factors such as risk-based pricing, diversification and analysis of drivers of performance compared with the market as a whole (where there is beta, surely there is also something to be said about alpha)
  5. Describing how with better risk and return data impact investing can fit more readily into asset allocation frameworks of investors more generally
  6. Contributing to the debate on whether impact investing is an asset class in its own right, or is more of an investing style, or is a segment of SRI or ESG criteria based investing, or comprises a set of multiple asset classes.

Of course, having consistent time series investment data in an index form with comparable data on risk and return would also help these debates – see www.engagedinvestment for our pilot examination of an Index for Impact Investing.

Rupert Evenett     – written in and © 2012

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Financial Geography + Social Geography = Political Geography


Disclosure of financial and banking (and social investment) flows by geography really matters.

Financial geography + Social geography = Political geography

These days we need a political and financial geography more than we need a political economy.

Let’s explain.

As human beings, we are determined in large part by our geography.  We are used to accepting this in terms of the country we are born into – we know that for most of us, country = fate, good or bad.  Or at least is a pretty good explanatory factor for the life chances open to us.

But increasingly the region we are born into or even the ward (the neighbourhood) within our country more and more = fate.

An internal social geography of most countries is now an active determining factor in our lives.  As much or more than class, geography matters.  (Yet we prefer stories of national unity and national politics more than confronting the reality of geographic divisions – narratives of progressive politics and social justice are as prone as traditional politics to prefer national  assumptions of geographic homogeneity.  Undivided national social geography is the natural realm of the welfare state and the enabling state as much as it is of nationalism and “our island’s story”.

Two factors follow from this.

1.  A financial geography really matters too.  It matters that we understand the geographic nature of the flows and stocks of finance and financial investment in the country.  Where there is geographic inequality, financial geography is a powerful weapon either to mitigate geographic inequality and divergent geographic social need or to reinforce it.

Disclosure of financial and banking – and social investment – flows therefore really matter.  They mean we can map how financial investment and banking finance map onto the areas of greatest social need.  (And indeed onto a map of greatest economic opportunity).  From that we can see the gaps and opportunities in finance and banking – and whether finance and banking is part of the problem or part of the solution in creating jobs, economic prosperity and opportunity.

And of course that is true even more for social investment.  Mapping is a powerful tool for seeing where social investment is flowing from and to and where impact capital is being allocated among beneficiaries.  It shows how allocated impact capital compares with, say, a map of the most deprived wards and how need and social investment compare.  Not all social impact is deprivation related of course; different maps would serve different purposes.  But overall, how social investment as a whole maps onto social need is an important part of the social investment story.

2.  Before “economics” established itself, the phrase “political economy” was the phrase in vogue for economists to describe their art and its habits of thought still prevail.  Implicit in a political economy is the state as the lowest meaningful geographic unit of account.  Political economy (modern economics) then concerns itself with national flows of investment, consumption and expenditure, with national measures of employment and inflation and with the national measure of GDP.  Socially it would once have concerned itself with class.  But it was – and modern economics still is – geographically blind.

But geography is fate for many and the geographically particular characteristics of most peoples’ lives are key determinants for them.  Just as behavioural economics is recognition that economics has been psychologically blind, so a geographic economics is needed to make up for geographic myopia.

A political and financial geography, addressing a social geography, should replace the geographically unitary state preconceptions of still prevailing political economy.

And disclosure of banking and finance and social investment flows by geography really matters.

Rupert Evenett (c) 2013 

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Who is the customer in impact investing?

Who IS the customer in the impact investing market?

I ask because one of the lessons to be learnt from mainstream financial markets in the run up to the credit crunch was that they lost sight of who the customer was. This is one of the factors behind the great bubble inflation and bubble burst that has not been as emphasised as others.

Alongside asymmetric incentivisation structures for bankers and traders, imbalanced team and organisational structures that over-emphasised “Sales” to the exclusion of all else, and an erosion of a responsible risk culture, there was a gradual elimination of the very idea of a “customer.” Investment banks moved from being advisers to being principals – even in advisory businesses like corporate finance, and the relationship with the businesses who actually were their customers migrated from an adviser-client relationship to a principal-principal relationship.

This was fundamental. If everyone is just another actor in the market, all on the same level then all that is left for responsibility to be owed to is some much more abstract and amorphous idea of “society” as a whole. Before you can talk sensibly about what responsibility and what level of responsibility you have, you have to know (and really know, internalising it) to whom your responsibility is owed. To make responsibility concrete, and not just abstract, it is importantly about “Who” as well as “what”.

Yet its not always straightforward to say who. And if you are not sure in a new market, before you know it organisational cultures and behaviours have become set before getting the responsibility question settled. Conversely, if you can be very clear who your customer(s) is/are, then that is a powerful shaper of your culture and mode of behaviour.

There are two temptations it seems to me to be resisted. And there are two right answers.

The Temptations

One temptation, because government(s) is an active player in the impact investing space is to see impact investing as a subset of the wider policy “market” and to see government(s) therefore as the customer. This might be all right. But it keeps impact investing and how it thinks about what it does at quite an abstract level. It runs the risk of impact investing being kept too close to the wider public issue of public service/aid delivery and public service/aid reform. And it cuts impact investing off (more) from direct contact with the financing needs and strategic problems of front line impact organisations which should be the driving force of impact investing’s financing structures and innovations and thoughts about how much financing is needed. The bottom line is that impact investing is about the concrete practice of investing – an outcome of policy not a piece of policy.

Another temptation, a subtler one, is to see the end beneficiaries as the customer. This is more attractive, seemingly. It casts impact investing firmly as part of the social sector and its values. And those values are an important driver for many of us. But there are risks here too. It risks cutting out the front line organisations that actually have the institutional know how and set up to deliver the impact. It risks abstracting impact into something financial and single factor rather than something achieved through a complex array of operational, financial, community and local based factors. And it risks abstraction too in “beneficiaries” as a class being as distant as “society”. If you are serving a large abstract concept how tightly held in practice is the idea of “responsibility”? – in theory lots but in practice abstraction seeps away at that. All the more so when because you know you are helping “beneficiaries” you know you are by definition doing good, and who needs any more responsibility than that?

The Right Answers

The first right answer, then, is the front line organisations that impact investing invests in. They are the customers of impact investing. This casts impact investing as a source of finance for and service to the front line social sector. This has several advantages. First, it reflects the reality of the money flows and “follow the money” is a good principle. If you want to help beneficiaries directly get into the front line. If you are in impact investing, use your financial as well as social experience to help front line organisations help others. Secondly it means that impact investing is confronted with the actual financing needs and problems of front line organisations which is a great prompt to innovation, to structuring, to investment readiness advice, to getting capital flows flowing on the right investment terms. Thirdly it means that responsibility becomes very concrete; there are the customers to whom responsibility is owed. No need to imagine them because there they are. And they are of course the best channel to earning impact and helping the end beneficiaries so we help the end beneficiaries most by recognising our responsibility to the organisations best placed to help them. Casting impact investing as a service sector (with service sector responsibilities) seems to work well.

The second right answer is your funders. For some impact investors that is government. But for most it’s investors in your funds, in one form or another, or depositors. Clearly there is a direct customer responsibility to them for proper custodianship and investment of their funds. That’s good and healthy and concrete. My only observation would be that the customer responsibility to funders needn’t be and in fact can’t be exclusive of a relationship of responsibility to front line social organisations. The impact investing role is a mediating one – it introduces the demand for capital to the suppliers of capital. Without an appropriate relationship with the demand-side and understanding of their needs, the most interesting and most appropriate product cannot be supplied to the supply side.

Feel free to disagree on the answer. But the “who is the customer” question is really important and will over time fundamentally shape the culture and development of impact investing.

Rupert Evenett (C) 2013

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Recognising a Wider “Finance for Social Purpose” Market : Building Coalitions Across Different “Social Finance” Markets for Scale and Impact


Why not build new coalitions across impact investing, community finance and other new finance markets to scale up all these new and emerging markets of “social finance” and fulfil a prospectus of reconnecting finance with social purpose.  All these new markets have more in common than divides them – they are all about achieving new models of finance, serving the underserved and realizing the economic growth and social impact that result.  And these new markets, despite great achievements, are still very small compared with mainstream finance.  On their own, what they can achieve is limited; they can cooperate for greater effectiveness while still preserving their identities.  Let’s find ways for community finance, social investment, social housing finance and other markets to work together and form active trading and marketing collaborations to realize the on-mission impact and clout of what they can achieve together – coalitions across different “social finance” markets as well as within them.  Let’s call this a wider “Finance for Social Purpose” market.

The Community Finance Coalition in the UK, led by the CDFA (Community Development Finance Association) and its inspiring chief executive Ben Hughes, held a conference yesterday (25 January) that was as important as it was timely.  And which had resonance for the impact investing/social investment market and other “social finance” markets not just for community finance.

Titled From the Margins to the Mainstream”, with an immediate focus on the community finance market, its theme was the need to scale up community investment in the UK.

I want to strongly support its findings on urgency and a major financing gap as well as its conclusions generally while offering a solution to one of its main conclusions which was to build new coalitions and new language for articulating and delivering a much needed scale-up in a new sort of finance, a finance for place and community, a finance for social impact.

In my terms I call this “Reconnecting Finance with Social Purpose”.  I see a natural coalition or tapestry of different new and emerging alternative finance markets that are used to defining themselves closely and tightly by reference to very specific missions and values but which also need to recognize that for maximum effect in changing the way finance is offered and the way finance is popularly understood there is much more that unites them than distinguishes them

Including Social Investment and Impact Investing , Community Finance, CDFIs, Credit Unions and Co-ops, Social Investment and Impact Investing, Housing Association Financing, Mainstream Financing to Civil Society Organisations (and maybe peer to peer financing should be in there) this is about them recognizing that they form part of a bigger tapestry of what I call a market for Finance for Social Purpose – and should actively work together on trading collaborations and marketing collaborations.

Quantifying the Need and Urgency for Scale-Up

Commissioned by the CDFA and supported by RBS (through its Inspiring Social Enterprise initiative), ICF GHK in its report produced for the conference “Quantifying the need for community finance in the UK”, found that in 2012 community finance organizations in the UK delivered £0.7 billion of community finance against an estimated current annual demand of £5.45-6.75 billiona gap of some £5 billion.

In response to these findings ICF GHK recommended that sector associations needed to work together to provide leadership and champion the development of the community finance market. 

“The scale of unmet demand can only be met through a partnership of public, private and social investors – through [establishing] a viable and sustainable community finance system as an established and embedded feature of the UK’s financial landscape” the report said.

“Community finance organizations, if capitalized to do so, would generate sustainable economic development and social well-being in communities across the UK.  Currently, society and the UK economy are losing out” the report added.

This is NOT because of any failing by the community finance sector which on the contrary has taken major steps forward in establishing itself over the last ten years, serving some of the most underserved areas of the country.  Over £800m of loans has sustained tens of thousands of businesses, social enterprises and jobs as well as saving thousands more from predatory lenders.  (See “JUST Finance: Capitalising Communities, Strengthening Local Economies”, CDFA –

Rather it just reflects community finance’s stage of development which sets challenges for the next ten years.

As Ben Hughes said ( in“JUST Finance”) – “Impressive though the past decade’s achievements are, we must do more to scale this potential and make it a reality… to achieve the step change in wealth creation, new jobs and economic growth” that community finance is capable of.

This is the backdrop to creating new strategic coalitions within community finance.

Recognizing a coalitional Market of Finance for Social Purpose

As well as coalitions within the community finance market and within other new social finance markets considered separately, markets like impact investing and social investment, this same strategic context and sense of potential calls for coalitions across different “social” finance markets taken together.

A brute fact is that even taken together, all these new and emerging “social finance” markets are tiny compared with mainstream finance.  Community finance in the UK is running at £0.7 billion per annum.   UK social investment might grow in the next few years to hit the first £1 billion (says Boston Consulting Group).  In contrast, the big banks in the UK made £75 billion of loans to SMEs alone.  If the job is to “mind the finance gap”, that’s a huge finance gap.  If we want to realize the potential of community finance, of social investment and of other new markets then we should collaborate to get on-mission scale and clout.  If part of the objective is to transform what “finance” means and establish new norms and instinctive understandings of what finance can include, then we need scale – for our missions, not in opposition to them.

In each of these markets we are not used to thinking this way.  What distinguishes “our” market often seems to matter more.  Missions and values promote difference between small markets that would be much better off collaborating. 

Social investment for example is about impact; Big Society Capital as an exemplum cannot support investments that are not aimed at achieving social impact and which is not achieved through social impact organisations.  Investment in community, in place, that achieves great social impact but which is achieved through investment, say, in local small enterprises and businesses that create wealth and jobs and through that create social benefits do not fall within the definition of social investment.  The opposite also applies. 

A focus on differences finds it easy to segment markets and, by segmenting, fragment what amounts to large scale impressive social effort, that  together shows the potential for transforming what finance can stand for and mean.

Particular missions and particular values matter.  This is about “and” not “or”.  This is about looking at collaborations between different missions not supplanting or diluting distinctive values and missions.

The call, merely, is to look as much as what these different markets and missions have in common as at what distinguishes them. 

They each of them in their way are about reimagining finance, about reconnecting finance with broader social purpose.  Through their different missions and segment of the market, they are each about targeting finance at achieving sustainable social value as well as financial and economic value.  Each of them is about not being second rate, is about real investment and real finance, about sustainable business models.  Each of them is about developing new business models, about developing new credit worthiness models, about understanding the outcomes of finance in a broader richer way.

Lets recognize those similarities and recognise each market as being in part a different aspect of a wider market – a wider movement – for finance with social purposeCreating a new language for finance – for “social banking” – creating new norms of finance for the wider population to understand that rest on bigger simpler ideas rather than on the technicalities and technical language of different specific markets. 

The impact could be huge.

Rupert Evenett (C) 2013

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Investment loves an index.

Investment flows are encouraged, cultivated, guided by an index.

Investment loves more data and more transparency generally of course but in an investment environment there is something particular about an index as a special type of data content.  In the lives of most emerging markets, the development of an investment index is typically a critical piece of infrastructure, one of the key steps in moving from emerging to emerged and being able to access broader deeper sources of capital from wider groups of investors.

An index for a new and emerging market is about giving clarity on risk and return – those all-important investment characteristics that define a market and its investment case.  So many emerging markets have become properly emerged at the point when investors get confidence in risk and return.  And clarity on risk can often at the same time demonstrate that the risks in the new market may be above average risk but are not as high as might have been thought.  Still an “alternative investment” market but an investible one.  Many new markets have gone along that route.  An index can help a process of transformation of risk understanding as well as understanding of returns.

Impact Investing is no different from other emerging markets, in this respect at least.  It may have a mixed currency for its returns – a blend of social return (or impact return) with financial return – but if it is successfully to reach out to wider groups of investors and to help existing impact investors see what they have achieved then impact investing too needs the help of an investment index to tell its investment story.

Here are six specific reasons why Impact Investing needs its own investment index:

  1.  MARKET DEFINITION:  by setting out the risk and return characteristics of impact investing and the range of investment types and products within it, an index gives essential definition to impact investing as an investment market.  It addresses the basic investor questions: “what is the yield of impact investing?” and “what is the risk in impact investing?” that currently cannot be answered objectively and for the market as a whole.
  2. COMMUNICATION:  there is no one place to go to find out about the impact investing market.  There is a lack of basic data on how big the market is, how much capital has been invested, how much capital has been lost, what the trends are, what sectors are being invested in, in what geographic regions, how much is being invested in the most deprived regions and helping to close investment gaps, how much is start-up investment and how much is investment in maturer social enterprises.  By developing common standards and definitions, an index promotes common standards for investment reporting by impact investing generally.
  3. BASIS FOR PRICING:  by making available aggregate market data for risk and return, categorized into different sectors, stages of development, geography, product types and so on, an index provides a basis for comparing like with like and therefore a more transparent basis for pricing new investments.  In a relatively new market, price discovery is of course an ongoing process but it needs more data to work on.  In time, more fully worked out risk-based pricing can develop.
  4. BASELINE FOR PERFORMANCE:  for potential new investors and for existing investors alike (including helping existing funds’ own marketing) an index provides a baseline for performance for the market as a whole and for different sectors and products.  A basic investment tool, over time it can lead on to the basis for analysis of the drivers of performance, for deriving the beta of impact investing (and even looking at sources of alpha and smart beta).
  5. BENCHMARK FOR ASSET ALLOCATION:  by giving more clarity on risk and return in impact investing, an index puts impact investing into the same framework of investor expected and required returns as investment markets generally.  By being able to compare returns and risk with alternative investment opportunities, impact investing can be put into the same framework of asset allocation for investors.  That helps open the doors to investibility for wider groups of investors and the potential for wider real investment flows. 
  6. BENCHMARK FOR INVESTMENT READINESS:  by demonstrating what existing impact investments (successful and less successful) have done at a market level and in time at an individual investment level, an index gives shape in investment terms to what potential new investee organizations have to be able to demonstrate to meet investor requirements.  This provides a benchmark for investment readiness.

Developing an investment index for Impact Investing is an example of how innovation can be driven by carrying an idea from one area of activity (capital markets) into another area of activity (impact investing).

I first conceived the idea of an investment index for Impact Investing in 2011 when co-authoring a report on the development of Impact Investing (“Making Good in Social Impact Investing”) with my now business partner Karl Richter.  The idea was based on my combined experience in capital markets banking, in chairing a front line charity and social organization, and in social investment – a finance person who gets the social sector.  We included the idea as a recommendation in our report and Karl and I subsequently founded Engaged Investment to develop and implement the index idea together.  We have now fully funded a pilot for what we are calling EngagedX – The Index for Impact Investing, a pilot which is running now and which we will report the results of during 2013.  See for more about our index and our ideas behind it.

Rupert Evenett (C) 2013

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