Impact investing: a very old idea

Joe Ludlow and Jo Casebourne - 01.11.2012

At the Socap conference in San Francisco in early October, over fifteen hundred people gathered to talk about the "intersection of money and meaning". Socap is the biggest gathering of impact investors in the world, and participants who travel to San Francisco from every continent are described as 'pioneers' seeking to "direct the power and efficiency of market systems toward social impact".

In the UK, impact investment (or social investment as the UK has historically described it) is experiencing a surge of publicity thanks in no small part to the launch of Big Society Capital, a £600m fund of funds established to develop and shape a sustainable impact investment market.

From this, anyone would think that impact investing is a radical new idea. But arguably it is a rediscovery of a very very old approach to investing. Impact investing can probably trace its history back to the foundation of the building society movement in the coffee houses of eighteenth century Birmingham. There the early industrialists pooled their resources as a co-operative so as to provide finance for their own community to build housing. Those pioneers were using their money to achieve a community or social goal and a financial return - not a bad definition for impact investing then and now.

Since then the financial system has changed rather radically. Building societies have mostly demutualised, financial supply chains have lengthened and become more sophisticated so that savers and investors know very little about the ultimate use of their capital, and latterly the financial crisis has driven an immense distrust amongst the public in our financial institutions.

So it isn't surprising that the Governments and investors are focussing on this old idea. But only ten years ago the market for impact investment in the UK barely existed[1] and it remains tiny with a particular lack of risk capital for innovations and early stage social ventures being a real problem.

If we look back to the early 2000s, the UK social investment movement was focussed on getting better access to finance for charities and community organisations. It was argued, that organisations in this sector, need finance like any other and that they experience worse access to it than private companies. The pioneers of the industry focused on investing in certain legal forms or under-served postcodes to address this. As a result UK social investment funds and other financial intermediaries have continued, in the main, to organise themselves with this focus. As the market has developed we have seen intermediaries become further segmented by the type of finance they cover. For example, Charity Bank mostly supplies long term mortgages, Bridges Ventures and Big Issue Invest manage social enterprise venture capital funds and Venturesome provides working capital loans to charities and social enteprises.

We think that it's surprising that so few impact investment funds focus on particular areas of social impact e.g. education, health, social care, and that there is little specification at the fund level of which outcomes funds are investing to address. If this old idea is to make a big difference in the future, then investing for specific outcomes has to become the market norm - in fact just like it was for the building society pioneers of the 1770s.

Over the coming days, this series of blogs will go on to explore: