The Rise of Social Capital Markets

This week in San Francisco some 1200 people have gathered for SoCap10, the third annual meeting of what has already become a sort of Woodstock for those interested in social capital markets. Judging by the many invites to SoCap-related parties that we have received (much appreciated) and California’s relaxed laws on marijuana use, it may have more in common with the original festival than Warren Buffett’s annual “Woodstock for Capitalists” in Omaha, Nebraska, where the closest anyone gets to a legal high is sipping Cherry Coke. Sadly, we couldn’t get to SoCap this year, so are left to speculate wildly…

Speculating wildly is, of course, what social capitalists attribute to the mainstream capital markets – and are determined to do something to stop. The first SoCap event was held shortly after the fall of Lehman Brothers and, as we write in our new book, The Road From Ruin, there was a surge in registrations after Lehman collapsed because, according to Kevin Jones, who co-founded SoCap, “some of them had worked on Wall Street and thought they could find a job that used their skills and made them feel more useful. Others simply wanted to see if there was a better way of doing capitalism.”

It is great to see that the number of people engaged in this search for a better way of doing capitalism is growing so fast. At the heart of this is the attempt to create a new asset class called “impact investing”, which Matthew wrote about last year in The Economist. This is the classic ‘doing well by doing good’ kind of investment – which generates for investors simultaneously a financial and a social/environmental return. The financial return part of it means, in theory, that the mainstream capital markets can be harnessed to drive social progress, rather than social entrepreneurs having to rely on the far smaller pool of philanthropic funds.

An interesting study earlier this year by Hope Consulting calculated that a whopping $120 billion could be mobilised for impact investing. (Suffice it to say, it would be surprising if money currently allocated this way amounted to more than a percent or two of that amount.) It concludes that “the key barriers investors see relate to the immaturity of the market, not the social or financial qualities of the investment opportunities” and recommends that organisations looking to unlock this market should a) clarify what impact investing means b) build awareness of impact investing and the opportunities available for investors and c) develop and disseminate information on impact investing to financial advisors. That all seems rather obvious, but is certainly true.

From our perspective, one of the biggest challenges that needs to be overcome for impact investing to achieve its potential is to come up with a better measure of success than the traditional capital market metrics of the latest profit number or share price. So we are pleased that the Global Impact Investing Network, an umbrella group of serious financial institutions interested in impact investing, announced at SoCap a new version of its effort to standardise reporting on social impact, called IRIS. This still has a long way to go, but is at least heading in the right direction.

Another huge challenge is to connect better the different sorts of capital markets that could invest in social change – from pure for-profit at one extreme to charitable giving at the other. We wrote recently about how to do this – to create what we call a “capital curve for a better world” – in the excellent Innovations magazine. All those different forms of capital are represented at SoCap10 – so let’s hope that between the panels and the parties some serious joined up thinking is getting done.