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Commentators on one side of the political spectrum attribute this failure to the lack of resources available to the state and to the state’s reluctance or inability to act appropriately. Commentators on the other side attribute government’s shortcomings to the inherent inefficiency of the state itself. The truth is that the political process, which focuses on short-term gains, does not favor long-term, preventative investment of the type required to address major social problems.

The social sector, which is also called the voluntary, non-profit or third sector, has done its best, with the support of philanthropic donations and government, to address the social problems that fall through the gaps in government provision.

Some argue that the social sector’s problem is that it is significantly under-resourced. Others argue that the insufficiency of resources is in part a consequence of the sector’s reliance upon philanthropy — from foundations and from individual donors — that can be unpredictable. Both critiques may be correct: the social sector has a problem in accessing capital, often because of a lack of a reliable revenue stream, and, as a consequence, it is inefficient, especially in respect of building sustainable organizations, securing funding and utilizing assets to support large-scale activity.

Recent moves to make the social sector more efficient, by focusing on improvements to the management of both the donors and the recipients of grants, are an important development. The Bill & Melinda Gates Foundation applies rigorous criteria to the assessment of the performance of organizations in receipt of its grant funding. Michael Dell’s philanthropic work is similarly rigorous. Their goal, according to Harvard professors Robert Kaplan and Allen Grossman, is, essentially, “to find and fund the Microsofts and Dells of the non-profit sector.”

In fact, such moves are more necessary than ever, as deficit-ridden governments seek to pass greater responsibility onto the shoulders of the social sector. An example of this is the UK Coalition Government’s strategic objective to foster the “Big Society.” In essence, the Big Society agenda seeks to pass a significant portion of responsibility for social cohesion back to the community via the voluntary sector, and, at the same time, to confer greater legitimacy upon such community work and to provide incentives and support for it. However, the social sector as currently constituted is unlikely to be able to address the scale of the social need; or, to put it another way, to meet the scale of the social challenge.

This is where social entrepreneurs come in. We know that entrepreneurs create jobs and foster innovation. In that sense, they already make a substantial social contribution. But entrepreneurs have special qualities that could make a significant beneficial impact were they to be applied to social issues. The entrepreneurial mindset embraces leadership, vision, the ability to attract talented people, drive, focus, perseverance, self-confidence, optimism, competitiveness and ambition. To these one might add an appetite for taking informed risks, an unwavering focus on results, a willingness to take responsibility, a grounded sense of realism, astute judgment of opportunities and people, and a fascination with the field of enterprise in question. The engagement of entrepreneurs in the social sector, bringing in their wake high expectations of performance, accountability and innovation, could lead to significantly increased social impact.

Could the social sector be transformed to allow the emergence of entrepreneurs from within its own ranks and attract social entrepreneurs and capital on a large scale? The answer is yes, provided that we can create an effective system to support social entrepreneurship, by linking the social sector to the capital markets and introducing new financial instruments that enable entrepreneurs to make beneficial social impact while also making adequate financial returns for investors. Given these conditions, it is possible that social entrepreneurs and impact investors will significantly fill the gap between social need and current government and social-sector provision. Indeed, were social enterprise to achieve significant scale, it would transform the social sector and lead to a new contract between government, the capital markets and citizens.

In this process, charitable, institutional and private investors, attracted by the combination of social as well as financial returns, would bring into being a new asset class: impact investment. In a recent report, JP Morgan came to the conclusion that impact investments already constitute an emerging asset class: “In a world where government resources and charitable donations are insufficient to address the world’s social problems, impact investing offers a new alternative for channeling large-scale private capital for social benefit. With increasing numbers of investors rejecting the notion that they face a binary choice between investing for maximum risk-adjusted returns or donating for social purpose, the impact investment market is now at a significant turning point as it enters the mainstream… We argue that impact investments are emerging as an alternative asset class.”

This new asset class requires a specific set of investment and risk-management skills; it demands organizational structures to accommodate these skills; it must be serviced by industry organizations and associations; and it must encourage the development of standardized metrics, benchmarks and even ratings. As has been observed by the impact-investment firm Bridges Ventures in the UK, such an asset class should provide welcome diversification for capital markets: at times of economic stress, price-sensitive business models appropriate to lower income neighborhoods can prove more resilient and also find wider applications in the mainstream market as both margins and consumer spending power are squeezed.

Not surprisingly, politicians as well as academics, entrepreneurs and investors are paying increasingly close attention to these developments. In the US and in the UK, and now also in Canada and Australia, steps are being taken to provide social entrepreneurs with access to the same kinds of resources as business entrepreneurs. The USA’s Social Innovation Fund ($173 million) and the Investing in Innovation Fund ($644 million) are notable examples; as is the proposed creation of the UK’s Big Society Bank. In Canada, the Federal Government recently received the report of the Canadian Task Force on Social Finance, whose recommendations include requiring public and private foundations to devote a proportion of their funds to mission-related investments; clarifying fiduciary obligations so that pension funds and others can invest in social programs; introducing new financial instruments for social enterprise; and marshalling government support for social enterprise, directly through seed investment and business support services and indirectly through fiscal engineering.

How likely is it that such steps will succeed? In answering this question, we would do well to consider that the global economy faced a similar moment of challenge and opportunity in the 1970s and 1980s, when many of the most familiar names in the post-war corporate world started to decline and shed jobs, among them General Motors, American Motors, Courtaulds, ICI, Smith Corona, Olivetti, US Steel, Bethlehem Steel, Kodak and International Harvester. The question then was: what would take their place?

What took their place was a new wave of business enterprise helped by venture investing, mostly focused on high-tech industries. This is the wave that brought us Intel, Cisco, Oracle, Microsoft, Apple, Sun Microsystems and Genentech. The hi-tech wave has since swept the world, taking us into the embrace of Google, Wikipedia and Facebook and ushering in a communications and information revolution based on global access to information from multiple sources. It has thereby profoundly changed global culture.

Just as hi-tech business enterprise and venture capital, working in tandem, have attracted increasing numbers of talented risk-takers since the 1970s, so social enterprise and impact investment are now attracting a new generation of talented and committed innovators seeking to combine new approaches to achieving social returns. Social enterprise and impact investing, in short, look like the wave of the future.

About Sir Ronald Cohen Sir Ronald Cohen is chairman of Bridges Ventures and The Portland Trust. He chaired the UK’s Social Investment Task Force and the Commission on Unclaimed Assets and he is a founder-director of Social Finance. Until 2005, he was executive chairman of Apax Partners Worldwide LLP, which he co-founded in 1972.

Joanna Reynolds, project lead and program director of the SiG division Causeway, says the guide is targeting social entrepreneurs and anyone interested in social ventures to explain how social finance can support the opening, operation and expansion of organizations pursuing social and environmental outcomes. According to Reynolds, it’s the first guide of its kind to provide these tools in a convenient format.  “There isn’t anything like it in the world, as far as we know, in terms of an accessible and hopefully easy-to-understand resource for people to learn about social finance,” Reynolds tells Axiom News. The project took nearly a year and a half to complete and involved a number of collaborators like SocialFinance.ca, Ashoka Canada and the B.C. Centre for Social Enterprise.  Bruce Mau Design was engaged in the creative process, and Reynolds credits the internationally-recognized design firm along with volunteer Helen Yeung for challenging the group to keep the content accessible to diverse readers. Reynolds says a major asset of the guide is the section featuring social finance stories, in video and article format, which can build greater awareness of the possibilities for social finance. “The purpose of the guide is to really tell stories of social finance at work. We feel that a great way to understand social finance is through examples and illustrations so people can see this is what it is, and it applies in these kinds of ways,” says Reynolds, who adds most people would be unaware of the organizations listed in the guide. Since launching the resource, Reynolds says they’re receiving great feedback, and people are excited the content is available. She’s encouraging people involved in social finance to submit their comments and any new projects they’re working on, as the guide will be updated. SiG is also planning to promote the resource to community organizations and networks that could benefit from the information. Reynolds adds this is part of SiG’s vision to move social finance from an innate and mostly uncoordinated sector to its next stage of growth — a co-ordinated and accessible system. To read Your Guide to Social Finance, click here. If you have feedback on this article please contact the newsroom at 800-294-0051 or e-mail camille(at)axiomnews.ca. Login or register to post comments Axiom News: Change is our product. News is our process. Click here to learn how. Front Page NewsStrengths Movement Cincinnati Summit Who We Are Our Services Our Clients Resources Contact