Social Investors vs. Social Businesses: Who will win the struggle for the future of SRI investing?
By Marta Maretich @maximpactdotcom
We all like to talk about how the social, responsible and impact (SRI) investing sector is growing—and current research indicates that it is flourishing, with more capital and a wider range of investors now entering the field.
All that is good—and it’s what we’ve all be working for. Yet if there’s one thing experience has taught us about deploying the new market approaches to generating social and environmental benefit, it’s that the detail matters at least as much as the big picture.
A closer look at the way the sector has developed in recent years reveals more than just growth: There’s been an important shift in the story we’re telling ourselves about SRI investing. A movement that began with an emphasis on social entrepreneurs and social businesses serving the needs of beneficiaries has become preoccupied with investors and the mechanisms of the marketplace. What caused this shift to happen? And is it necessarily a bad thing for SRI investing?
Changing the subject
As we’ve tracked the growing body of research documenting the exponential growth of the SRI marketplace, we’ve noticed something strange:
Once most of the literature in the field came from social investors, like Root Capital, and accelerators, like the Skoll Foundation, who were actively engaged in developing socially beneficial businesses.
Today the focus has shifted away from social businesses and their beneficiaries. Instead, sector bodies, like the WEF, the G8 Social Impact Investment Taskforce, UK SIF and USSIF, as well as big financial advisory firms (EY, Deloitte, Citi to name just a few), are turning their analytical lenses on investors and markets in an effort to demonstrate (and, in some cases, capitalize on) the potential of the new SRI investment approaches.
In a sector that has its deepest roots in social entrepreneurship, microfinance and microlending, this change may seem surprising, even worrying. Why has it happened?
1. Investors demand attention
First, investors are driving the market for SRI investing and this has lead financial firms and other analysts to study them, and their investment habits, more intensively.
As one example, a USSIF trend report for 2014 tells us that: “Money managers increasingly are incorporating ESG factors into their investment analysis and portfolio construction, driven by the demand for ESG investing products from institutional and individual investors and by the mission and values of their management firms. Of the managers that responded to an information request about reasons for incorporating ESG, the highest percentage, 80%, cited client demand as their motivation.”
This is one more piece in a growing body of evidence that shows personnel in financial firms finally waking up to the fact that their clients are interested in SRI investing. At the same time, they’re realizing that the ability to use these approaches is likely to be an important selling point for their businesses in the future.
This realization comes rather late in a sector that saw small, socially concerned family offices, like Omidyar, pioneering the practice of impact investing back in 2007. But with a new generation of private investors, led by wealthy young millennials and women, now asking for SRI investment options, the message is finally getting through. Mainstream financial firms are focussing more of their attention on socially-motivated investors and promoting SRI offerings to attract what they now realize is a growing client base.
2. Mainstreaming forces a market focus
The second reason for the focus on investors and markets has to do with the recent raft of mainstreaming initiatives for social investing.
In an effort to draw larger investors into the SRI marketplace, these initiatives sought to gather sector information, such as existed, into reports aimed at larger investors. The reports were designed to demonstrate that social investing is, in fact, a real market. They presented their case in the language of the mainstream and included statistical data, graphs, tables and pie charts—the works. Everything about them was engineered to convince the heavy hitters that SRI investing was something they could engage in securely, responsibly and even profitably.
Several of the most important reports in this vein have been produced by the WEF as part of a series aimed at large institutional investors, including insurance firms and pension funds. The G8 Social Impact Investment Taskforce and its various working groups also produced material aimed at the largest investors including national governments thinking of entering the SRI market.
All this is a world away from the early literature on social investing, which emphasized its impact on social entrepreneurs and beneficiaries, often people in emerging economies and those at the bottom of the pyramid.
Yet the motives behind the mainstreaming push were good. They reflected the commitment of a few far-seeing financiers, like Sir Ronald Cohen, who realized the potential for scaling social and environmental benefit through using the powerful mechanisms of global finance. And, to judge from the buzz around ESG at Davos this year, the approach has been successful in getting mainstream finance to take SRI more seriously.
Aren’t we forgetting something?
This suggests that the shift of focus to markets and investors was needed to get bigger financial players to engage with social benefit. Yet in other ways the rush to mainstream may have been a distraction from some of the most important challenges still facing our sector.
These include fundamental questions about the role of business in society and the role capital plays in supporting the development of companies.
The mainstreaming of SRI investing, though it may be beneficial, doesn’t challenge the status quo behind the international capital markets. Rather, it works with the prevailing forces of global finance in an attempt to turn at least some of them in a more favorable direction. This approach is pragmatic—and its unthreatening nature partly accounts for its popularity at places like Davos—but for some in our sector it doesn’t go far enough toward bringing about a permanent change to the way we do business.
On a more down-to-earth level, the recent focus on investors and markets leaves out what many think is the most important element of all in this equation: Socially beneficial businesses.
We have a lot of experience in operating for-profit businesses and non-profit organizations that deliver social benefit, but socially beneficial businesses are still a relatively new kind of animal to us. Despite progress in the sector, we still have a lot to learn about how to operate companies that are financially sustainable and able to deliver extra-financial benefits at the same time.
What really matters
The commitment to pursue benefit alongside profit, when genuine, touches every aspect of a business. Leadership, governance, operations, compliance and reporting (among other things) are all affected and we need to understand much more about how this works in practice. The influence of investors, especially those that take an active role in governance, is yet another factor, still little studied or understood, in the development of social businesses.
With so much still to learn about how to “do” socially beneficial business, the recent emphasis on investors and mainstreaming markets can seem misplaced. However, it makes sense in one important way: Only by doing more socially beneficial business will we ever have a chance to find out what really works and develop effective models. And only by attracting sufficient capital will we have the opportunity to do more socially beneficial business.
Time to re-focus—again
So, should the story of our sector be one of global financial markets and canny investors, or should it be one of heroic social entrepreneurs and white-hat social businesses?
The answer is: It needs to be both.
But now that the larger markets and a more ample pool of investors are showing interest, it’s time for the sector to shift its focus back to actually making socially beneficial businesses work across a range of global contexts.
It’s emerging that one of the dangers of mainstreaming is that social businesses can find themselves forced back into the mold of regular companies with no social benefit goals. To avoid this, they need clearer roadmaps for how to manage and develop their companies, especially as they grow to scale. Investors and markets also need to find better ways to engage with socially beneficial businesses in order for the partnership to work successfully.
More research in both these areas is needed. The question is: Who will do this work and so help write the next chapter in the ongoing story of socially beneficial business? Could it be you?