Introduction to social investing

There are many definitions for these terms.  We offer in this document our view on the evolution and meaning of some of the key terms in use in the sector, but please let us know through the feedback forms if you disagree. 

Twinned key objectives

When an organisation has twinned key objectives, one financial and one social, we consider it a social business (SB).  (For a definition of “social” see our answer to 'What is social?').  The relative importance of financial and ethical objectives in social businesses varies and shifts over time and must be constantly calibrated.  The beneficial ownership of the value of the SB may differ greatly from one to another.  In some cases SBs may be under full private ownership and management: in others all of the profits and value may support a social objective.  There are hybrid models which are difficult to classify.  What is critical about social business, in our definition, is that the social and financial objectives balance and support each other.

The role of government in the inception of social business

It begins with Government.  Government is the construct that has emerged, through which we, as citizens, have tacitly and explicitly resolved to have our affairs managed.  In the United Kingdom we have, over time, implicitly chosen a representative system of Government that operates through a Parliament and within a liberal democracy.  The Government of the day is meant to exercise the authority we have vested with it on our behalf.

When individuals believe Government delivery in certain areas is not providing satisfactory solutions to public and private problems, voluntary activities have sprung up as one way to “plug” the gap. We call these bodies charities.  Through charities, individuals, either in a personal or corporate capacity, are able to support activities which they perceive not to have been done to the desired extent by Government. 

Charities and social enterprise

Charities need cash flow and other resources in order to operate; they cannot normally tax or print money and their ability to borrow is limited. Substantial resources which could be devoted to good causes are “wasted” in fundraising.  A large proportion of capital comes with conditions attached, sometimes hindering the charity. Charities increasingly explore and develop entrepreneurial activities to generate revenue streams, lessening the dependence on external funders.  We consider such undertakings to be Social Enterprises (SEs): entrepreneurial organisations which largely serve social ends.  SEs are business responses to social problems. Some SEs generate all or most of their income through business activities, but their primary purpose is not to make profit. The distinction between a charity and an SE is subjective. 

Large corporations practising Corporate Social Responsibility (CSR) are NOT social businesses.  This is because their primary objective remains financial and their CSR activities, socially beneficial as they may be, exist to serve the primary objective (which is financial), because of stakeholder demands from staff, customers and shareholders and others.   Social businesses are businessess that have twinned key objectives (of equal importance), one financial and one social.

Environmental businesses are the trickiest to define although we certainly include them in the broad category of social business.  This is because everything they do serves Social, Environmental and Ethical (SEE) objectives—an example being renewable energy firms.  Their growth engenders the replacement of a type of energy production that pollutes our environment with one that is less harmful.  Therefore, even if the management of such firms exists simply to maximise profits, the SEE mission is so well integrated into the operations of the company that we consider them social businesses.  

All businesses in the health sector perform an obvious social role, whether it be providing healthcare or developing drugs to cure disease.  However, pharmaceutical companies have a terrible reputation in the ‘social’ world for being ‘excessively’ profit oriented.  Key accusations are that they focus on the more lucrative developing world market whilst neglecting the world’s poor, that they price products out of reach of disadvantaged groups, and that they  profit from placing private patents on publicly funded research (in universities).   Every business that we have included on this site has been assessed on an individual basis.  As yet we have no pharmaceutical companies on here, simply because we have not yet been convinced of their social objectives.  We have, however, included a number of healthcare companies.

This term is used freely throughout the site, yet it is hard to define precisely.  “Social”(as in social business, enterprise or returns) connotes that which is non-financial and relates in a positive way to someone other than one’s self. This lends itself to a very broad definition as people have different views on what is positive— what one sees as positive, may not be seen as such by another.  This site welcomes a very broad definition of “social”.

Thus social businesses, as described in “What is a Social Business” (see the first FAQ) do something positive for others; for society.  An economist might describe such businesses as generating positive externalities—effects which benefit society and are given away by these businesses at no cost.  Businesses that generate negative externalities (such as pollution) might be described, in this context, as “anti-social”.  Such effects may be social, ethical or environmental (hence the frequent use of “SEE” instead of just “social”).  However, this site uses the term “social” to encompass all three.

Individuals may invest directly in public and private companies. A proportion of the businesses that are covered on socialinvestments.com are publicly traded: shares can be bought on an exchange through an intermediary (such as a stock broker) or online. Social businesses may also be looking to raise capital through share issues or financing rounds. Another possibility is to invest in a socially responsible investment (SRI), green, or ethical fund. This may give you exposure to a range of social businesses through a fund management house. Individuals are advised to check the investment strategies, screening criteria, and performance of all funds prior to an investment decision or seek advice, possibly from an IFA from EIRIS' list of Ethical IFAs.  

Before you invest, it is advisable to decide what you are looking for from a social investment, in terms of financial and social returns. Some investors are more interested in environmental stewardship and some in development goals, for example. Some social businesses will offer a greater potential for financial returns.

There are very few ethical current accounts but quite a few saving accounts available with competitive interest rates- the best known are offered by Triodos, Cooperative, Smile (the Cooperative's online banking service) and the Ecology Building Society.  More information can be found at the individual websites.

The Charity Bank uses customer deposits to provide affordable loans to charities.  It 'often lends where banks or building societies either will not make a loan at all, or will only do so on unaffordable terms'.  An example would be when a charity wants to purchase capital assets and cannot get a loan from a traditional bank because it has no dependable revenue scheme.

Socially minded investors can invest in a Community Development Financial Institution (CDFI).  A CDFI lends and invests in ‘areas and underserved markets that cannot access mainstream finance’ (http://www.cdfa.org/).  Individuals and institutions can invest a minimum amount of money (£1-£100,000 depending on the CDFI) and can hope to get their money back after 5 years.  Some investments are eligible for tax relief.

There are number of bond funds available to ethical investors (F&C, Aegon, Rathbone to name but a few) as well as general ethical bond issues.  The funds, like equity funds, have differing ideas on what constitutes ‘ethical’ and so should be treated with caution by investors who are prioritising the ethical benefits of their investment.  The GAVI Alliance has now made two bond issues of AAA-rated bonds to  fund its healthworkers administering vaccines in the developing world for diseases such as yellow fever and measles, supported by the pledges of future aid from donor governments.  Golden Lane Housing (the housing arm of Mencap) was the first UK charity to issue bonds in 2003. 

According to the socialinvestment.com glossary, SRI is;

‘a type of investment that is made according to social, evironmental and ethical criteria as well as conventional financial criteria. The criteria varies according to the preferences and strategies of the SRI fund or individual investor.’

This is now a booming area of the financial services industry; figures from the Investment Management Association (IMA) show that, at the end of Q3 2007, there was £5.8 billion invested in ethical funds, a figure 35% larger than that for Q3 2006. 

Critics of SRI point out that SRI does not necessarily mean giving equal importance to SEE and financial criteria.  Nor does it necessarily mean an investment with a social return.  It can just mean investment in companies that are less socially irresponsible than others in its industry and of a comparable size. 

The SRI industry is at an early stage of development and at present some of the funds available to retail investors appear to be mainstream funds with a ‘green’ marketing spin.  A typical ethical fund portfolio is basically an equity index tracker fund and must therefore include stocks from across all the sectors represented on the stock exchange.  This means that most SRI funds have major holdings in the extractive industries, for example. 

Catalyst believes that, as social investing develops, it is likely that this group of funds will no longer be seen as a specialist choice, and that the skills in analysis of SEE in conjunction with financial criteria will disseminate to funds now considered to operate on a pure financial return basis.   SRI funds may themselves become more sophisticated and operate across the whole fund management universe including fixed income, bonds etc.  Catalyst's newly launched VC fund and that of Bridges Community Ventures are forerunners in this marketplace, giving institutions the possibility to invest in unlisted social businesses.

A number of high street banks and fund management firms offer ‘ethical ISAs’.  More information about these can be found on the Profit with Principle website.  As for any ethical  investment vehicle, the meaning of ‘ethical’ varies from company to company.  Some, for example, will invest only in FTSE 350 companies, while others may target smaller companies that claim to really 'make a difference'.  To Catalyst’s knowledge there is no ISA that invests specifically in social (as opposed to environmental) business, although some (very few) may be included in an ISA portfolio.