Social investment – Is it all just window dressing?

20 November 2019

Social investment – Is it all just window dressing?

Latest estimates issued by the Global Impact Investment Network (GIIN) indicated that the global size of impact investment was US$502 billion in 2019. Elsewhere, the US SIF Foundation's biennial report on US Sustainable, Responsible and Impact (SRI) Investing Trends has put a value of US$12 trillion on SRI in the USA alone, up 38 per cent from US$8.7 trillion in 2016.

Regardless of the definitional and inclusion criteria used to inform different estimates, there is consensus that ‘socially-minded’ investment is a big, and growing, market.

However, imprecise terminology has meant that different types of ‘socially-minded’ investment have been variously championed or demonized as if they are an undifferentiated entity with a singular and consistent internal logic.

The overarching narrative is seductive: “If you want to invest your money, you can do so in a way that does social (or environmental) good, while also making you money”. Everyone is a winner! If this sounds too good to be true, it probably is.

That’s because not all ‘socially-minded’ investment (1) makes you money, and/or (2) produces genuine social (or environmental) outcomes. At one extreme, investment in a Social Impact Bond does not guarantee a financial return. Social Impact Bonds are not bonds. Financial returns are contingent upon achieving defined social outcomes. On the other hand, the standards for demonstrating and verifying social outcomes are often low in many other forms of social investment. Social outcomes may be claimed or assumed without any effort at checking or evidencing. Where some form of evidence is put forward, there are concerns about the assumptions around attribution, and further question marks around additionality.

If we are not careful, the loose terminology around social investment may be used to create a halo effect around the individuals and organizations that purport to engage with such investment, distracting us from scrutinizing whether such investment has really made any substantive and meaningful improvements in the lives of people that wouldn’t otherwise have happened.

If we are genuine about using financing to directly and deliberately do social good, then we have to set clear criteria and proper standards to ensure that this really happens, rather than simply assuming that it will happen just because we are well-intentioned.

This brings me back to SIBs. We often hear of SIBs being ‘too difficult’, with high transaction costs and long development time. However, many of the features of SIBs that make them ‘difficult’ (although not all) are precisely those stringent criteria and high standards that we expect social investment to meet if we are to be properly assured that they do genuinely produce desired social outcomes that would not otherwise have been achieved.

If, by making SIBs and other forms of social investment ‘easier’, we water down these standards (e.g. measuring outputs rather than outcomes), then we really need to question the whole narrative around social investment and the comfort we derive from engaging with it.

If these higher standards mean that forms of social investment like SIBs remain niche, then it says something about the real motivations driving engagement with social investment (or rather, what we actually mean when we say ‘social investment’), and also gives us a better idea of the true size of the market, which is likely to be much smaller than what the headlines have been touting.

Dr Chih Hoong Sin

Director, Innovation and Social Investment, Traverse

Chih Hoong has been invited to speak at the Social Enterprise Summit 2019 in Hong Kong (21 to 25 November 2019) about ‘Designing Good Finance’, as part of the overarching Summit theme of ‘Designing Happiness’.

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