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The new social economy Segueing into his lecture, "The Promise and Peril of the New Social Economy," Reich promptly informed his audience that his talk would not be about Facebook or Twitter or other social media.

"Same name, different guy," he said. "For the political junkies among you, you will know what I mean when I say that while I am lesser in stature, I am greater in height."

After a short performance by the a cappella group Everyday People, some welcoming remarks by Howard Wolf, president of the alumni association, and an introduction by Provost John Etchemendy, Reich stepped to the lectern. He prefaced his lecture by offering his apology to anyone who thought they were going to hear a talk by "the other" Robert Reich, the diminutive Secretary of Labor in the Clinton administration.

"By 'new social economy,' I mean the broad new landscape of organizations that seek to produce social benefits," he said.

"The exciting fact about the world that you graduates are about to enter is that there are many novel and innovative ways for people to do good." Rattling off some of the buzzwords associated with the new approaches, such as "impact investing," "venture capitalism" and "social return on investment," Reich acknowledged the enormous innovation and ferment that has been taking place. "This innovation brings along with it great promise," he said, "but also, I hope to show you, some real peril." Historically, he said, a flourishing democratic society is composed of three distinct sectors: the business or for-profit sector; the government or public sector; and the social or nonprofit and philanthropic sector, this last constituting the social economy.

Blurring the lines But innovations of the past 20 years have broadened the social economy far beyond the world of nonprofit organizations and foundations, and the new social economy is full of hybrid organizations and philosophies.

In the for-profit sector there have been innovations such as "corporate social responsibility," in which corporations assume responsibility for the social impact of their actions.

And there is socially responsible investing, in which investment funds avoid industries embroiled in moral controversy, such as tobacco companies, or purposely invest in companies that produce social returns. Such funds barely existed 15 years ago, but now constitute more than 10 percent of professionally managed investment funds. There are nonprofit organizations that seek to create operations that earn revenue in addition to accepting donations, and "philanthrocapitalism," as The Economist dubbed it, in which philanthropists purposely employ business strategies in their grant-making efforts.

Government also acting

Even government is getting into the act, Reich said, with the creation of the White House Office of Social Innovation, which seeks to create new types of partnerships between government and the private sector, and between government and the public sector. The "Investing in Innovation Fund" of the Department of Education involved 12 foundations, including the Gates and Hewlett foundations, which contributed $500 million to the department to unlock $650 million in federal funds. "Now there's a genuinely novel idea," Reich said. "Foundations making grants to the federal government." Because of this blurring of boundaries between the traditional three sectors, the new social economy offers today's graduates a host of choices in "doing good." "If you aim to do good and pursue a social cause, you can be sector agnostic: It doesn't matter what sector – public, private, civil society – one enters," he said. "That is an amazing new world and quite possibly a brave new world."

Will it work? But innovation can also be perilous, as there is no guarantee that all innovations lead to positive social change, Reich pointed out. Hybrid organizations like social enterprises might seem great in theory, but in practice they must cope with a deep tension between the profit impulse and the social mission impulse. "Will profit overwhelm principle?" he asked. Reich said the 20th-century regulatory framework governing the old three-sector society will eventually prove inadequate for the cross-sector collaborations that are increasingly popular in the 21st. So, he queried, what does this brave new social economy mean for those about to graduate from Stanford? Citing the purpose of the university as set forth by Jane and Leland Stanford, "to promote the public welfare by exercising an influence in behalf of humanity and civilization," Reich called it "a beautiful, honorable and worthy mission." "As you commence the next stages of your life, remember this: Your education here has not been frivolous," Reich said. "It has qualified you for personal success, yes. But – not to put too much pressure on you – we adults are counting on you to solve the global financial crisis, to figure out the war on terror and to come up with the governance structure of the new social economy."

The full transcript of the proceedings can be viewed online and provides a very helpful update on all the key issues surrounding Social Impact Bonds and Big Society Bank.[i]

Background to Big Society bank

Stephen Bubb’s comprehensive article ‘A new financial landscape’ in Caritas, March 2011  sets out the gestation and remit of what has been a long-awaited social investment bank and a useful summary can be found in the chapter 5 (page 37) of the Cabinet Office’s report, Growing the Social Investment market: A vision and strategy.[ii]

State aid legislation and other hold-ups

Cohen told the PASC that the Big Society Bank’s opening target of July 2011 would be missed “by a matter of some months” because of delays from the Cabinet Office in steering it through the complexities of EU state aid in financing public service provision legislation (in place to prevent the warping of the rules of competition between member countries). He said he encountered exactly the same thing with Bridges Ventures, his own organisation, and that he was confident that not only would the necessary permissions be given but that “the EU will turn out to be a big proponent of social investment.”

He also explained that the other complications was that the government had no agreement with UK banks the £200m of funding they had agreed on as part of the Project Merlin settlement, and that these details were still being sorted out.

In the meantime and agreement has been signed with Big Lottery so that it could fund some of the projects that Big Society Bank would eventually take over.

Long-term delivery  

When he was reminded that nine out of ten new enterprises end in failure, he countered with the response that everything ‘involves a risk’ and that failure in social enterprise was a form of philanthropy anyway. However, Cohen is a seasoned venture financier who does not set out to lose money. He added: “we see our objective as getting the social sector going. We have to preserve the value of our capital in doing it but we don’t have to maximise its value – we would like to be proactive.”   Cohen was confident of the Social Enterprise Bank’s long-term viability, explaining that real success could take ten or 20 years to materialise with cash positivity projected in seven years’ time.

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

“We have a sustainable matrix system that allows us to invest in high-impact sectors like oil only if the company is exceptionally sustainable,” Mr Straehle says.

It remains to be seen how permanent that caution is, but the political shift away from nuclear in Europe, particularly in Germany, could restrain European banks from funding such projects further afield.

This may just be current pragmatism, but it reflects homegrown changes in business strategies by banks with international reach.

For example, in recent months mainstream British banks have been drawn, sometimes screaming, into doing more to assist the broader society. The so-called Project Merlin agreement between the big UK banks was centred on government lending targets, but it also bound the banks into several other do-good projects that are more ambitious in their scope than standard government-sponsored financing initiatives.

The biggest idea is the creation of a £2.5bn ($4.1bn) private equity-style Business Growth Fund to kick-start small business investment, while a further £200m has been committed to the Big Society Bank, a project conceived by David Cameron, UK prime minister, to support regional development ventures.

There is a theoretical promise of commercial returns for the banks, but few expect them to be generous.

In the interim, nonprofits seeking to grow their operations have been stuck in a state of arrested development.

Elizabeth Berger, president of the Downtown Alliance, which supports economic development in lower Manhattan, welcomed the mayor's announcement as a necessary step in enabling nonprofits to play their part in promoting the city's economic vitality.

According to the mayor's office, more than 13 organizations have gone to out-of-state funding sources for assistance in financing capital projects totaling more than $337 million since June 2009. The administration also estimates nonprofits have at least 20 shovel-ready capital projects stuck in the development pipeline with a combined price tag of more than $400 million.

While the city's nonprofits don't enjoy quite the same cachet in terms of revenue-generating potential as either financial services or leisure and hospitality, the group exceeds both sectors with respect to employment. While the other sectors employ approximately 434,000 and 320,000, respectively, the more than 42,000 health, human services and cultural nonprofit (HHSC) organizations throughout the five boroughs support approximately 470,000 employees, according to the mayor's office. That sector is the largest private employer in city—employing more than 15% of New York's non-governmental work force.

“New York City is home to tens of thousands of nonprofits that are looking to expand, create jobs or move into new facilities, but for the past few years they have faced more expensive financing costs, while some have had to forgo expansion altogether,” Mr. Bloomberg said, in a statement. “This new entity will make it easier and more inexpensive for our critical nonprofit sector to grow and expand.”

“At a time when many not-for-profits are struggling to make ends meet amid the nation's fiscal woes, this new issuer will serve to strengthen and support an increasingly important sector in our city's economy,” Ms. Berger said in the mayor's office statement. “In lower Manhattan, not-for-profits represent a vital and growing sector, and this action recognizes their value.”

Capital projects and investment in expansion and facilities upgrades have been curtailed as the volatile economy takes a toll on nonprofits struggling to make up for reductions in funding support. “For over three years, nonprofits like ours have faced far too many obstacles in obtaining financing to grow and expand,” Sisi Kamal, chief financial and operating officer at the Friends Seminary School, said in the statement. “The ability to locally access necessary financing in an efficient and cost-effective manner would be a significant investment in the future of our organization and that of many others serving the residents of New York City.”The administration said the new entity, a local development corporation, will open in the next four to six months and that financing requests will be based on board approval. The five borough presidents, in conjunction with the comptroller, will be charged with nominating directors to serve on the board.