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.

Some specific observations:  No such thing as the Big Society? – considering that at one stage this was supposed to give policy substance to the Big Society, it is striking how absent the Big Society is from the White Paper. That’s one cut it didn’t make.  I did a control search and only came across one Big Society reference in the whole report, and this was not to the idea but to the Big Society bank. So this leaves an obvious question about how central the Big Society now will be to the Government? One practical effect of there being no Big Society strand is that the tenor of the White Paper is much more consumerist, gone appears to be the emphasis on social citizenship and responsibility.  This leaves a big gap because, as our Commission on 2020 Public Services argued, the big challenges of the future will need to be met through citizens and the state working together to create better social outcomes.  Very few concrete proposals – This is about direction of travel, rather than specific proposals. In fact, there are very few concrete proposals. Instead this is much more like a Green Paper in which general propositions are put out for consultation, with the question being what specific policy changes would these require? This is clearly a long way from what some of the Big Society evangelists had originally wanted to see.  No short term wins for the voluntary sector – Earlier in the year there had been speculation that the White Paper might contain some specific guarantees for the voluntary sector to help offset the consequences of Council grant cuts.  But, whilst there are warm words for the role of the voluntary sector, and some new development money and support to help develop social social enterprises, there is no specific commitment to, for example, a quota of Council services to be subject to voluntary sector right to bid.   Diversity of provision – the boldest statement in the White Paper is that there is no case for monopoly state provision of services, except for the special cases of defence, criminal justice and policing.  The case is made for all public services to be run on the basis of autonomous institutions such as Academies and Foundation Trusts, which could be run by businesses, mutuals or social enterprises.  However, there are no specific proposals to apply this to any particular service area.  Local government is the big winner – this is the most pro-local government policy paper to have been published by the Coalition.  Whereas, the distinct impression in previous policy developments on public service reform has been that local government was being sidestepped, now it is much more central to the Coalition’s plans for decentralisation.  The principle of decentralisation which is set out in the white paper bears some similarity with the subsidiarity principle developed in the 1990s by the European Union, under which decisions should be devolved to the lowest possible level of government.  The new twist to this is the emphasis in the white paper on establishing neighbourhood councils in urban areas to mirror parishes and to be responsible for the same types of very local, community and public space services.  But the White Paper also makes the case for more powers and greater financial autonomy for local authorities and, in one of its few specific proposals, also recommends that skills funding should pass to some Councils, something which cities like Manchester have been strongly pushing for.

As Nick Timmins noted in the FT today, there are a number of tensions within the White Paper, which are not even acknowledged, let alone resolved.  He cited the principle of promoting diversity whilst at the same time needing to guard against failure, a weakness of successive health reforms and a particularly current concern given the collapse of Southern Cross.   But this isn’t the half of it. Other questions which the White Paper doesn’t confront, but which a credible reform plan would have to resolve, include:  Service integration vs institutional autonomy – how can local government integrate services in the way that the white paper suggests, whilst at the same time vertical service silos are being strengthened through the promotion of institutional autonomy in schools, hospitals, and now in every other service?  Consumerism vs social citizenship – how can a consumerist approach to public services help strengthen the co-productive relationship which there will need to be between citizens and services to meet the social challenges of 2020 and beyond?  Ideas vs practice – how can the Coalition move from exhortation to implementation? The White Paper may contain a framework of principles but it does not set out a convincing strategy as to how reforms based on these could be implemented.  Over the coming weeks we at 2020 will be analysing the Coalition’s reform agenda in more detail and looking to see where the opportunities exist for developing better social productivity practice.  Please let us have your comments and ideas.  Ben Lucas

Social business - the 3rd way money. Unlike traditional business, social business operates for the benefit of addressing social needs that enable societies to function more efficiently. Social business provides a necessary framework for tackling social issues by combining business know-how with the desire to improve quality of life. Therefore instead of being self-focused social business is all about others. Prof. Yunus has already shown the effectiveness of this new type of business: his clear focus on eradicating extreme poverty combined with his condition of economic sustainability has created numerous models with incredible growth potential.   Social business follows seven principles.

It will be an entirely new kind of business. Until now running a business has always been self-focused, founded for the purpose of making

They would be overseen by a social finance regulator that would operate within the proposed Financial Conduct Authority, the successor to the Financial Services Authority.

The framework would create new legal categories of 'social investment' and 'social investor'. The two organisations hope to persuade the government to make it into law.

The National Endowment for Science, Technology and the Arts and the law firm Bates Wells & Braithwaite have proposed a new regulatory framework for social finance aimed at making it easier to invest in voluntary sector organisations.

"At the moment, it's easier to give £100 to charity than to lend £100 to charity," said Luke Fletcher, an associate at Bates Wells & Braithwaite and author of the report.

The new framework, he said, would make it easy for charities and social enterprises to create a financial prospectus for a bond or share offer, without the need to offer the tight protections for investors that are currently required.

"The main target for this would be the mass affluent, who are not currently considered sophisticated investors," Fletcher said. "Charities would like to create offers targeting these people, but they find the legal restrictions too onerous."

Fletcher said there were already exemptions for community benefit societies, formerly known as industrial and provident societies, and he wanted to extend these to all third sector organisations. "I think there's a chance of getting this into law now," he said. "There's a real window of opportunity. The reform of the Financial Services Authority is already under way, there's big interest from government in social investment and there's a drive to reduce red tape for the sector." The Cabinet Office has expressed support for the idea of a new regulatory framework in its strategy paper Growing the Social Investment Market, in which it said it would "seek further evidence on the impact of the regulatory framework on social and community investment to assess whether it is proportionate". One of the six key recommendations in Lord Hodgson's report on red tape in the third sector, Unshackling Good Neighbours, was the creation of a class of "social investors" who could invest under less strict guidelines because they understood they were receiving both a social and financial return.

It’s getting off to a slow start, but the Big Society Bank looks set to mark a new dawn for social investment, bringing a potential £400m into the market. But before this, in 2007, a new-style social lender entered the market with a relatively modest £15m, before growing into one of the largest social investors in the country.

The organisation started off as the Adventure Capital Fund, which then became known as Futurebuilders – generating the organisation's biggest fund to date, finally settling on Social Investment Business – a clear catchall to describe the organisation, and a nod to its ambitions to run the Big Society Bank, a concept known as the social investment wholesale bank under the Labour government.

Despite its positive effect in financing the charity world, some have criticised it for growing so large so quickly – it has managed a number of funds on behalf of the government and is worth around £400m. Lewis makes no apology:

“With Futurebuilders (the £215m fund managed by Social Investment Business on behalf of the Office for Civil Society) we were supposed to help charities win something like 300 contracts. In fact they won over 800, which shows that if you give them a bit of appropriate help they can win lots of contracts by providing innovative and transformative services.”

Lewis is also proud that the write-off rate of loans with Futurebuilders was so low, especially since it funds organisations which can’t access traditional finance.

“Through Futurebuilders, we lent £120m to organisations which couldn’t get bank finance, and the culminative write-off rate on that money over six years is less than 4 per cent. I’m extremely proud of this fact.”

Its outgoing and first chief executive, Jonathan Lewis, says he is most proud that Social Investment Business has shown that social investment works:

“Though it was slightly unpopular to grow this quickly, I think creating a large social investor moves the market on a little bit, and the market is going to be moved on again by the Big Society Bank.”

Lewis’ time at Social Investment Business could be viewed as the frontier of social investment. His new role follows a similar pattern. Lewis leaves to head the staff-run NHS social enterprise spin-off Bromley Healthcare, one of many public service providers deciding to become a mutual under minister for the Cabinet Office Francis Maude’s new "right to provide" agenda. Maude is leading a drive to support employees of public services to set up mutuals.  Bromley Healthcare is a staff-run healthcare provider organisation rather than a commissioning one. Lewis joins it as chief executive in August.

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.

“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.”

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.

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.

“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.

Charities like the Beat Bullying, which has helped countless children and young people deeply affected by bullying, and ICENI, which treats and tackles addiction in Ipswich and Suffolk, are using the money to modernise. This will help them make the most of more opportunities for them to deliver public services and new sources of finance, such as capital investment from the Big Society Bank, which the Government is developing as part of its drive to support a Big Society.

Francis Maude said: "We all want a bigger, stronger society where people get involved and do their bit.

"This isn't new - there are already loads of people right across Britain taking responsibility and making our communities better places to live.

"What is new is that this Government is making it easier for people to do more: giving people power to improve public service, putting communities in control, and supporting people to help others."

Nick Hurd said: "The Transition Fund is part of a much wider package of support for charities and voluntary groups and social enterprises. "The Cabinet Office will invest around £470million in direct support over four years. "We are opening up new opportunities for charities to deliver public services, cutting red tape and developing new sources of finance such as the Big Society Bank." The Transition Fund was announced in the Spending Review, October 2010. The Fund closed to applications on 21 January 2011. £94million has now been committed and final awards will be announced later this summer.

“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.

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.

He told MPs that the matter could take “some months before it is completed”, but added that there was an agreement with the Big Lottery Fund to make investments in its place in the meantime.

Chair of the PASC, Bernard Jenkin MP, asked if the situation was frustrating. Sir Ronald said he had gone through the same issue when he set up the social investment company Bridges Ventures. He added: I am confident that we will get state aid exemption for the Big Society Bank from the EU and that, in fact, the EU will turn out to be a big proponent of social investment.”

The creation of the Big Society Bank could be delayed until next year as the government is still trying to secure state aid exemption from the EU, according to Sir Ronald Cohen, independent adviser to the Cabinet Office.

Sir Ronald said there was more room for agreement between the banks and government and stated that an announcement was expected in the next few weeks.

He added that the £200m investment, which will be on commercial terms, would not be at normal market rates and would not necessarily be a typical loan.

At the meeting, Sir Ronald also said it was projected that the Big Society Bank would be cash-positive in seven years. After Jenkins asked if there would be enough deal-flow, he said he was confident that the supply of money would create demand.

However, Sir Ronald admitted it was a challenge to galvanise local engagement after MPs asked whether smaller charities would find it difficult to engage with the Bank.

Sir Ronald also said the Big Society Bank may have to change its name as it wasn’t a bank.

To date £97.5m has been committed from the Transition Fund to more than 900 charities. Final awards will be announced later this summer.

The Transition Fund aims to help charities make the most of more opportunities to deliver public services and new sources of finance, such as capital investment from the Big Society Bank

Nick Hurd, minister for civil society, said: “All the charities receiving transition funds have a plan to overcome current challenges and emerge stronger. We recognise the hugely important contribution charities make to our society and we are committed to supporting them."

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

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.

"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.

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

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."

He was inspired after watching Toronto’s Centre for Social Innovation (CSI) purchase and retrofit a building using $2 million it had raised selling community bonds at $10,000 apiece. The bonds, which could be purchased by anyone, offered a 4 per cent annual rate of return over five years and were RRSP-eligible.

If the banks wouldn’t lend the money to a not-for-profit organization like CSI, then individuals who support the organization’s mandate just might. Tapping into CSI’s “social asset” proved a good gamble, as the community was quick to scoop up the bonds.

“This told me that the whole community bond thing was for real,” say Bida, convinced he could adapt the approach to support renewable-energy projects.

Their approach represents a low-risk investment for people who want to support “green” community projects and make some money, but who don’t want to spend thousands of dollars putting solar PV systems on their own rooftops.

Electricity from the plant will be sold into the grid under the province’s feed-in-tariff program, while waste heat could end up being pumped into a nearby greenhouse, potentially used to grow bamboo for the new pandas expected to arrive in 2014.

About 70 per cent of the project, or roughly $3.5 million, will be funded through the sale of community bonds that, like the CSI bonds, could be purchased through a self-directed RRSP. ZooShare hopes to offer bonds with a seven-year term and up to a 7 per cent annual return on investment.

For existing zoo members and those living within one kilometre of the zoo, the bonds will be sold in $500 units. Everyone else can pick them up for $5,000 each, unless they want to purchase a zoo membership. “We’re hoping this will sell more memberships for the zoo as a result,” says Bida, whose company ReGenerate Biogas is managing the project.

ZooShare is just one of several co-op ventures going the community bond route to raise capital for renewably-energy projects. Others include Options for Green Energy, SolarShare and WaterShare.

The zoo executives liked the idea and several months later Bida helped form the ZooShare Biogas Co-operative, a not-for-profit community co-op that plans to build a 500-kilowatt biogas plant at the zoo for about $5 million

t also offers a way for those without property, such as renters, or without the proper land or rooftop exposure, to participate in the feed-in-tariff program. Community bonds, in essence, make the FIT program more inclusive and get the broader population directly invested in their energy future, be it solar, wind, biogas or hydro.

“This idea of massive public involvement in the ownership and economic benefit of these projects is what we’ve all been working towards for the past 15 years,” says Deb Doncaster, executive director of the Community Power Fund, which supports community co-op projects with grants and low-interest bridge financing.

“All it will take is for one or two of these projects to be successful and the approach will take off.” Social media will certainly play a role. Facebook, Twitter and other social networking applications make it much easier for community co-ops to reach out to supporters. Spreading the word to the right people has become almost effortless. Still, a couple of barriers need to be overcome before you or I can purchase such bonds. For one, RRSP-eligible community bonds must be approved and registered with the Financial Services Commission of Ontario before they can be sold. Some say the commission is dragging it feet. SolarShare, for example, wants to issue community bonds in $1,000 increments that would offer a 5-per-cent return annually and be redeemable after five years. The funds raised from the bond issue will support construction of solar PV projects across southern Ontario. It’s all new territory for the financial services commission, which has proved a major bottleneck. “They’re tight on the resources needed to deal with this new landscape,” says Matt Zipchen, who as project manager for the Toronto Renewable Energy Co-operative is overseeing development of SolarShare. Zipchen says another roadblock is the banks. “These community bonds may be RRSP-eligible, but whether or not your bank will let you hold them is another question,” he says. “Banks are finicky about them. We’re just starting the process with the banks to see which ones will hold these bonds and which won’t.” It will all get sorted out over time. Indeed, all it will likely take is for one big bank to break from the pack before others start to follow. If demand for community bonds is high enough, that will likely happen. That’s what SolarShare, ZooShare and others are counting on. Tyler Hamilton, author of the upcoming book Mad Like Tesla, writes weekly about green energy and clean technologies. Reach him at tyler@cleanbreak.ca

Another potential barrier to this pay-for-success approach is that the funding to pay investors their return ultimately comes from government. These investments are not necessarily creating a new pot of money. Rather, they’re transferring the risk from taxpayers to private investors. In the past, government funding for social projects would pay for everything upfront, regardless of outcomes. Now, under impact bonds, they will only pay for results from non-profits after they have been achieved. So, are pay-for-success bonds a truly revolutionary way to fund charitable work, or is it just government funding repackaged?

espite potential shortcomings, these pay-for-success bonds are forcing people to rethink how the not-for-profit sector operates and funds its work. Applying private sector principles to charities is not necessarily a bad thing – many non-profits can benefit from working more efficiently and measuring their results. But whether these new bonds are the mechanism that will transform philanthropy remains to be seen.

While the Big Society Bank will offer capital to help social enterprises scale, it may not provide the right kind of capital for new, potentially ground breaking, ideas. Ambitious start-up ventures require investment to test their models and start paying their way. The Big Society Bank will not be issuing grants so it looks unlikely that intermediaries will, in turn, be able to offer the kind of "soft capital" required to new social enterprises. Largely avoiding the world of social investment, the successful graduate teaching programme, Teach First, secured its founding investments from businesses, government agencies and charitable foundations. This diverse range of sympathetic supporters sacrificed financial return to give the untested vision of Teach First a chance. Other successful start-ups continue to cobble together the finance they need rather than waiting for social investors to meet their needs.

To attract investment to scale, an enterprise needs a clear strategy, a robust model for generating revenue, and economics that scale (or, as the enterprise grows it will simply become bigger, and not better). This is tough; entrepreneurs often need support from some of the 100-plus organisations – identified in the NESTA-commissioned report, Growing Social Ventures – that are dedicated to supporting Britain's 65,000 social enterprises improve, expand or become more resilient. For example, Scottish social enterprise Working Rite was supported by the Young Foundation to develop a financially sustainable business model before it could attract capital to its apprenticeship-style work preparation programme, even though it had achieved better results for youngsters from tough backgrounds than its larger, commercial competitors.

While we welcome the Big Society Bank, the government needs to level the playing field in the ever-tighter fight for government contacts. Shrewd social entrepreneurs – like those behind Enabling Enterprise, Teach First and Working Rite – will need to continue to scrape around for risk capital, and scramble to build robust business models under innovative services. From on high the government declares that social enterprise is critical to the success of the big society, yet on the ground it can feel like "soft privatisation".