Sustainable Investing in the Social Sector

In the new business arena of 21st century while corporations all over the world are endeavoring to integrate Corporate Social Responsibility initiatives into their business operations, some have taken a more pro-active approach to realize social missions by setting up Social Enterprises (SE). Capital investment has always been an important topic for enterprises in all industries. It is even more challenging for social enterprises to get capital injection as operations for the purpose of community welfare are not very profitable compared with private businesses. HKU SPACE College of Business and Finance invited the world renowned pioneer in the social sector – Miss Kim Alter to speak about "Sustainable Investing: A Social Finance Primer" on 21 October 2010.

Passion is the Key

The term “social enterprise" is sometimes inaccurately interpreted as social service organizations, but in fact it is more than that. Social Enterprises generate their income through business operations but it is more than just a business entity. While social objectives are the ultimate mission, it is achieved by adopting entrepreneurial strategies and the income generated will be reinvested into the community. One key distinguishing feature of SE is the simultaneous pursuit of both social and commercial purposes. Dr. Jane Lee, Deputy Director and Head of College of Business and Finance, HKU SPACE gave a quick introduction of Miss Kim Alter and the most important element in the making of successful social enterprises. She said, “Although entrepreneurial skills are important in every business operation, social enterprises, being a major force of social change, require our passion and commitment to succeed." Profit maximization is not the sole purpose, engagement and partnership of different sectors in the community are more important to the future development of SE. That is why the topic of investing and financing SE is focus in this seminar.

The Social Finance Landscape

Kim Alter has endeavored for nearly 20 years to employ business tools and market-based approaches (social enterprise) in the social sector to create social change and alleviate poverty. Alter began her career as a social entrepreneur when she co-launched and directed a social enterprise, Visions in Action, with operations in five African countries.

This seminar was originally scheduled to be held in June this year, it was postponed as flights are grounded due to the volcanic dust cloud at the moment. So at the start of her speech, Kim explained what affected her plan, "After I received the news that all flights to Hong Kong were cancelled, I told HKU SPACE I was not able to appear in Hong Kong because of a volcano in Iceland." In an explosion of laughter, she referred that incident as an example of correlative nature of events in the present globalised world.

For participants with knowledge in business finance, what follows in Kim’s speech was full of insights and valuable information. She described the social investment market in the UK, where she has been working for the past years, as “rich and vibrant" in which large amount of money is involved. “However, there has always been some constraints in the financing work of social enterprises." Kim said. She revealed that the social finance market in some other areas of the world is inefficient due to high transaction costs and information transparency is hindered by inconsistent or non-existent metrics. In contrast with the private sector, return of investment are often goes unmeasured and unrewarded.

The social finance landscape is therefore a “one way street" where social entrepreneurs are continuously seeking for investors. There are three types of social investment options, namely investment type grants that generate exclusively social value also known as venture philanthropy capital, soft loans that generate mostly social value and some revenue, government incentives and of course, market-rate loans or equity.

Solving Social Problems with a Business

“The risk-return profile is unfavorable and there are control issues regarding the claim on benefit." Kim continued. A bee-keeping business with a social mission to provide women with job opportunities in Kenya was one of the cases Kim used to illustrate that discrepancies often exist between social and investors' objectives. “In many cases the ownership role of grants is unclear when the actual operation is bordered between social missions and productivity. The honey-producing business needed to be re-structured as a result." Kim explained.

Internally, entrepreneurship and corporate governance may help to bridge the gap between different expectations of various parties. But the key enabler for social enterprise capital market is government policy, according to Kim. After all, the objectives of the public and social sectors should be aligned, and together with contributions from the private sector, an overall understanding that “social entrepreneurship is solving social problems with a business" can then be achieved.

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