SPEAKER_01 0:12

You're listening to the Philanthropist podcast with Roger Davis.

SPEAKER_02 0:37

Hello, you're listening to the Philanthropisms Podcast. This is the podcast where we try to put philanthropy in context. And this week we've got a great conversation. It's with Scott Greenalge. Now, Scott is the chair of Social and Sustainable Capital, which is one of the longest standing social investment funds in the UK. So, as you might have guessed by this point, I was having a conversation with Scott all about social investment and impact investing and how it relates to philanthropy. So really interesting to get a chance to dig into a topic that we've kind of touched on at times during the podcast, but I'm not sure we've ever really kind of addressed front and centre. But I think it's a really interesting and important. So I sat down with Scott recently to talk about this, and we covered a whole range of topics. So we talked quite a bit about some of the definitions involved, which I think is sounds dry, but is actually really important. So what is the difference between social investment, impact investing, and some of the other terms that are out there like ESG investing? Does the, you know, is there a necessary trade-off between financial and social returns? So if you're trying to do social investment or impact investing, are there genuine kind of win-win opportunities where you can get both equally? Or does it always involve, you know, some degree of uh trading off the potential financial returns against the social returns? And even if there are win-win opportunities out there, is there a danger that if you emphasize them too much, it sets slightly unrealistic expectations about the market as a whole? We also talked about whether it is appropriate to use philanthropic capital as a way of subsidizing impact investing, either to reduce the risk or to make the returns sufficiently appealing to get more commercially minded investors on board. And you know, where that is appropriate, is it only a temporary thing? Is it a means to an end and then you know you stop doing it and there's an exit? Or is it an appropriate way of structuring social investment in perpetuity? We talked quite a bit about why the principle of additionality is crucial and what that principle indeed is, uh, and why it's important that when you're looking for social investments or impact investments, they go above and beyond what you could uh achieve through straightforward financial uh grants or or gifts, and indeed through commercial investment, so that they're bringing something new to the table rather than just slicing the same pie in different ways. And we also talked a bit about what the impact investing and social investment markets look like in the UK at the moment. You know, who are the main players funding it, what kinds of areas are they funding? What's the relationship between government policy, particularly when it comes to public service delivery and the market for impact investing or social investment? And is the UK unusual in this regard or is that something that we see everywhere? And we also talked about some of the risks that might come with the promotion and growth of impact investing and whether there was a danger of things like purpose washing or impact washing, where people end up claiming that they're doing social or impact investment in order to get a kind of halo effect or a reputational benefit, but actually aren't really doing anything of the sort, and what some of the ways in which we can mitigate these kinds of risks might be. So without further ado, let's get into the conversation with Scott. I think it's a really interesting one. So I hope you enjoy it. And I will be back at the end for the usual bit of housekeeping and some pointers to places where you can find out more. Okay, great. Well, I'm here with Scott Greenhalge. Hi there, Scott.

SPEAKER_00 4:12

Good morning.

SPEAKER_02 4:13

Morning, nice to see you, Rodri. Yeah, great to have you on the podcast. Um, and for those listening, Scott uh is here. He's the chair of Social and Sustainable Capital, and here to talk about well, the intersection between philanthropy and impact investing or social investment, and we'll get into in a moment what the differences between some of those terms might be. Um but maybe the best place to start, Scott, is for you just to say a bit in your own words about who you are, what your interest in these issues are, and what your experience is.

SPEAKER_00 4:40

Yes, well, thank you. And it's lovely to be here. I started my working life as a conventional banker, then private equity person, and then about 15 years ago started doing more and more in the not-for-profit space. So I had a stint with the uh England Committee of the Lottery. I've done lots around early years and early childhood disadvantage. And then happily those two worlds kind of collided when I became exec chair and helped set up the first long-term equity fund for social impact investing in the UK called Bridges Evergreen. Did that for about five years. And as you said in the introduction, I'm now chair of Social and Sustainable Capital, which is a social investment uh fund manager focused on supported housing. And uh both of those organizations are um distinct in that they will get into definitions, I suspect, but are distinct in the sense that they they are what I would call impact-first organizations, um, and we'll come back to that. My other role, just um at the main role at the moment, is I chair uh social care nonprofit called Certitude London. We're a learning disability autism mental health organization, uh, about 1,100 employees. So uh the budget of earlier this week looms large in our in our thinking at the moment.

SPEAKER_02 5:57

Anyway, but that's a that's a digression. It is, although maybe one we'll come back to because it's obviously very topical and front of mind for a lot of organizations. But I guess that the place maybe I wanted to start was to come back to something you touched on there, which is about maybe setting up a couple of definitions up front, which I think here is particularly useful because we're going to be using terms like impact investing and social investment and maybe ESG. Sometimes those seem as though they overlap or they get used interchangeably or as if they're synonymous. But I think you know you're quite clear that they're they're not, and that we maybe need to be a bit clearer about what the differences are. Can you just say a bit about what for you those different terms mean and how we should differentiate between them?

SPEAKER_00 6:36

Yes, and I and I think a lot of the confusion, and we'll maybe touch on some of this, comes from people using the same terminology and meaning slightly different things. So I think the generally accepted definition of impact investing is the where you have as an investor the intention to achieve measurable environmental or social outcomes and a financial return. So three bits intent, measurement, and a financial return. Social investment, in my language, um, is where you are funding the non-profit sector. Uh and that can stray into social enterprise, but but essentially your funding is of the non-profit sector with social purpose, so social outcomes. So, in a sense, therefore, social investment is a subset within impact investment, because impact investment's a much broader definition, and social investment, by virtue of funding non-profits, will, because non-profits don't have equity capital, will be lending in some shape or form.

SPEAKER_02 7:49

Yeah, absolutely. And then I guess the the other term that we just touched on there, that also for people you know who maybe aren't in this world so much, they might think, oh, how does that relate to you know ESG or kind of responsible investment in that sense? What's the relationship that we should be thinking of there?

SPEAKER_00 8:04

Well, I I think there is a relationship, but but ESG is different. I mean, ESG, environmental social governance is essentially a framework for an organization, whether that's a business or an investor, to think about the impact of that organization or that investment on environmental social governance factors. But the real purpose of it is for you to think of it in the context of what are the risks around E, S and G factors for your organization or your investment. And within that context, the real purpose of ESG is to take a more holistic view of the environment in which an investment or an organization operates and to make better investment decisions. So ESG is entirely consistent with better investment decisions, meaning better risk-adjusted financial returns over the longer term. I think ESG, so that's really the purpose of ESG. I think there is a benefit in ESG thinking because it makes organizations, investors more aware of a wider range of factors that are relevant. And if in becoming aware of those, they find ways to improve the carbon footprint of an organization, improve its social governance factors, there's a net positive in there. But I think the key is to be clear that the primary purpose of ESG is a risk management framework and tool.

SPEAKER_02 9:35

Yeah, absolutely. I think that really helps in terms of setting out what we're we're talking about. And I've got there's lots of things I want to pick up on on some of the kind of the features of the social investment as opposed to impact investing and some of the kind of fundamental principles. But I guess maybe a useful way to follow on from that is just to say something about what what the current landscape for social investment and impact investing looks like for anyone listening. Maybe particularly if you could say a bit about what it looks like in the UK, but also what the sort of wider context is at the moment as well.

SPEAKER_00 10:07

Well, the uh so um it it has been growing steadily and quite well actually for the last 10 years. And I want to come back to definitions because you we always have to go back to what we're talking, you know, to the define what we're talking about. So if you take um the Impact Investing Institute published a report not so long ago that that said that um the impact investing landscape or market in the UK had reached over 70 billion pounds. The big better society capital, uh um, which was set up by the government quite some years ago to be the sort of the key stimulus for the impact investing and social investment markets in the UK, published a report suggest saying that the social investment market in the UK was about 10 billion pounds now, and that has grown at circa 10% per annum for you know a decade. So on the face of it, quite significant growth, quite significant success. If you put those numbers into the context of the overall institutional investment market, they are still very, very small. So I I don't want to make a negative out of a positive, but actually even on those big numbers, we are talking about a very small percentage of the overall institutional investment market. Now, BSC's definition of social investment is in truth slightly different to mine, but that's probably a rabbit hole to avoid. Um, but um I I think the other sort of theme I'd bring into this is that is is this word additionality, and without wishing to labour too many definitions, but the additionality is the question of uh has your investment, let's stick with investment, but has your impact investment added uh to the social outcomes being achieved in some way or not? And just again going back to that definition I gave of impact investing, impact investing in the definition, and the impact investing institute in fairness used the correct you know definition of impact investing, but impact investing as defined doesn't include the concept of additionality.

SPEAKER_02 12:28

That's really interesting. There's a couple of things about the impact investment market I'd love to come back to, but I do really want to pick up on this question about additionality because this is kind of thinking one of the fundamental questions about social investment. And I guess my my particular interest as well is how the possibilities for social and impact investment relate to other perhaps more traditional forms of financing um social organizations and social goods and you know, kind of philanthropic capital and grant capital. And I guess what would be really interesting to talk a bit about is when we're talking about additionality, is it primary is the primary concern that in making blended or hybrid investments of some kind that we are in danger of replicating things that otherwise would have been funded through philanthropic means or grant capital? So we're essentially using social investment or impact investing, and if we hadn't done that, it would have just been covered by philanthropy anyway, so we're not really adding anything new. Or is it that we are um eating into things that otherwise might have been um viable commercial investments, but just sort of labelling them as if they're social investments, you know, kind of either way is the danger that we're just slicing the pie up in different ways rather than actually growing it or expanding it in any sense.

SPEAKER_00 13:48

Yeah, I think that is the the risk. And I think the risk is more around the displacement of commercial uh than philanthropy. And and and and again, one way to think about this is is, and the Impact Investing Institute and others use a thing called the spectrum of capital, where you basically say all investing money can be plotted on a spectrum from at one end of this continuum, money that only thinks about risk-adjusted returns, so two dimensions, risk and return, traditional investing, and at the other end you've got philanthropy, which only cares about the social or environmental return. And if you plot everything on that journey, you move through responsible investing, sustainable investing, impact investing where your focus is to generate market-level financial returns, impact so-called um with impact, through to impact investing where you are accepting a lower financial return or a greater risk in return for a hoped for better social return through to philanthropy in its various forms. So I think the risk around impact investing in this definitional sense is that are you labelling, to use your words, and I agree with you, are you labelling certain things that would have happened anyway in a commercial sense as impact investing? And in a sense, the impact investor's money is simply replicating what might have happened anyway. In other words, there is no additionality in terms of the outcomes achieved. I think where philanthropy plays its role on the basis that philanthropy has no expectation of a financial return, the risk of displacement with any with any money that expects some level of financial return is much, much less. I I think if there's a displacement risk around philanthropy, it is more in the allocations of investment decisions by philanthropists or endowments. Well, if I go to put it into in impact investing, I'm not going to put it into my philanthropy bucket. I think it's more about that than at the macro kind of allocation level, than at the funding this project or that project or this organization or that organization. I hope that makes sense.

SPEAKER_02 16:30

Yeah, it does. And I think, I mean, in a in a way, I mean, that's a fascinating question in itself, thinking about the individual psychology of a donor who might have the wherewithal to make both philanthropic, you know, traditional philanthropic donations and some form of social investment or impact investing, what does that mental accounting look like? And again, are those two separate pots in the mind of an individual? And so do they allocate them differently, or is there a danger that in deciding to put a certain amount of resource towards a social investment, that actually replaces the equivalent value that they would have otherwise made in traditional philanthropy, which is, I think, very hard to know, but it's an interesting question. I I really wanted to come back. You talked there about risk-adjusted returns and there being a sort of spectrum of thinking about the balance between what you want to achieve in terms of financial returns and the focus on um on social returns. And I guess one of the things that people often wonder about when they think about social and impact investing is whether there has to be some sort of necessary trade-off between the social and the financial, because increasingly it feels as though there are people who perhaps want to push the idea of impact investing, particularly, who want to claim that there's no such trade-off and that actually you can have these win-win-win um uh types of investments. Is that genuinely true? If it is, is that only a small part of the market? And a third part to the question, do you think there is potentially a sort of danger in in pushing that narrative too much because it sets unrealistic expectations about what is possible when the reality is actually in a lot of, you know, in a lot of instances, there will need to be some kind of trade-off?

SPEAKER_00 18:15

Well, I I I I at the risk of of coming back to this definitional question, I think, I think this question around definitions and additionality actually lies at the heart of the answer. Because if you if you are accepting the intent measurement financial return definition, which is the definition of impact investing, there isn't necessarily there are many situations where you can achieve some level of impact as defined with market normal financial returns. The question is though, are you simple if you if if you are focused on this additionality point and you're saying, well, actually, I want my in impact capital to be additional, in other words, to achieve something that wouldn't have happened otherwise, sort of the counterfactual, then there are a lot of studies out there that say, well, actually, if that's the case, then traditional finance wouldn't have done that, made that investment. So there must be some trade-off around either the risk dimension or the return dimension in in the pursuit of a greater social impact. So and and and therefore and I think a lot of the confusion in the sector about well, I've got to sacrifice returns to do impact investing or not, or I can achieve everything, I can have my cake and eat it, so to speak, comes from that kind of core point, which is does it need to be additional? Now there are quite a few, and going back over 10 years, there are quite a few uh studies that uh academic studies that argue both sides of this. Um so I mean, more recently, uh I think in the last last year, from Harvard University Academics, there was a study focused on the US, which asked the question, you know, is impact investing, should impact investing be additional? And is impact investing additional? And basically came to the conclusion that it should be and it isn't, or it isn't to uh very only, you know, they were looking at venture capital and growth equity uh impact investing, and concluded, I think, that something like 12 or so percent of the impact in so-called impact investing was additional, and that actually and they looked at both the uh pre-investment decisions, so ex ante, were you doing things that would have otherwise not been done? Answer only in a very small number of cases, and ex post, i.e., did you behave as an investor post-investment in a way that helped that organization drive greater impact than it would have otherwise done, because you could have either or both, and their answer was actually even more negative. Now they used a particular lens to answer the question, but they concluded that if you looked at impact investing through the frame of additionality, then relatively little of the impact investing was additional. Now, why does any of this matter? If I think about UK and UK social need, we have a lot of UK social need being addressed by philanthropy. We have outsourced a huge element of our public service delivery, think of social care and For instance, housing some of the housing management activities to the to non-government organizations. Many of those are not for profit, many of those are private sector, and depending on which bit of the public service delivery universe we're talking about, so those proportions will vary. If we are labeling private sector delivery of public services in some way as impact investing, where that private sector is actually seeking to, as the private sector legitimately does, to maximize its profit, well, then I think we're missing a trick. And maybe there's a need to think about, and again, back to that spectrum of capital, that element of capital, or how do we grow that element of capital, that yes, wants some level of financial return, but is actually willing to trade off some level of greater risk or lower financial return in the pursuit of greater positive social outcomes. And are those things in lockstep? And I could give examples where I think demonstrably, in in particular in social care or in this in public service delivery, where there is a trade-off between your financial return and your expected social impact.

SPEAKER_02 23:22

Brings me to something else that I wanted to ask, which is about the importance of measurement, particularly in terms of the element of social return or in social outcomes. Because it does seem to me you could get some way towards what you're saying by having a view of saying, well, as long as your people are applying an investment mindset in areas that we know to be socially beneficial, is that enough? But then it strikes me that the it's very hard to differentiate between something that is just a bad commercial investment in one of those fields and something that's possibly a good impact investment. Because in order to be able to say that, you need to be able to say something about the social side of it as well as the financial. And despite the fact there's an you know an enormous industry out there that's focused on this these days, it still feels as though there's a kind of fundamental asymmetry between our ability to measure financial returns in a way that everybody understands and is consistent, and the ability to do the same when it comes to the social side of things. So, what's your thinking in terms of how we make it possible for people to combine those two to get the right sort of overall measure of the value of an investment?

SPEAKER_00 24:33

Well, and as you know, there's been lots of work around impact measurement frameworks. I mean, impact management project being one of a number of examples. I I think the starting point is A, to do it, uh, to use a framework, to report against that, to think about some sort of independent verification in the way that financially you'd have an audit by an accounting firm. And and there are a lot of trends and efforts going into getting to a sort of standard form of accounting for impact measurement. I mean, it's it's it's a complicated journey. Um, and you know, historically, a lot of the impact measurement has been marking your own homework, which you know always has a has a limitation around it. Against that, it's incredibly hard to do an impact audit or to bring somebody in because huge additional cost, complexity, etc., etc. So I think the the sector's on a journey, the sector's made great progress. There have been a number of parties who have contributed massively, INP being one, to that progress, and it's got further to go. But I think I think the key watchwords, and it comes back to things like greenwashing and purpose washing and so on, is for the sector, the investment sector, to be as transparent as it can be. And I think that transparency starts with being clear about your intentions around risk return impact, and then being as clear and transparent as you reasonably can be about the ways in which you're measuring it.

SPEAKER_02 26:16

Yeah, absolutely. That makes a lot of sense. And one of the other things I was really interested to ask you about is less in terms of measuring uh the value of those investments, but more about structuring in them in the first place to deliver potential impact investments that have a rate of return, financial return on them that might be appealing to more commercially minded investors. In a lot of cases, it it seems as though one of the ways that people do that is to try and leverage more impact-first um uh forms of finance, particularly maybe even philanthropic. So you kind of combine a layer of philanthropy or more traditional grant funding to take absorb some of the risk or act as kind of first tier, you know, first loss capital, and that makes, you know, reduces the risk or makes the return slightly higher. What's your thinking about that kind of approach? Do you think that that is a sort of a positive way to use philanthropy? Do you think there are perhaps risks in terms of using philanthropy in that way? And and do you think those kinds of models are ones that work for a short period of time with an exit in mind, or are they something that you can kind of build long-term investments on?

SPEAKER_00 27:26

Well, I think it it's back to the horses for courses. I mean, it's a bit thinking of the spectrum of capital, thinking of this concept of additionality. If the levering in of philanthropic money, let's just stick with philanthropic or first loss money, enables something to happen that wouldn't have happened otherwise and crowds in other money, then arguably that is a positive because something is happening that would not have otherwise happened. The government, I mean, just picked the announcement in the budget this week, which was that there'll be a further consultation on a further tranche of money for the impact investment sector in the UK, uh, with detail to be examined by the Chief Secretary to follow. Now, from a government perspective, I mean, I'm not part of the government, so but but it it I would sort of think, well, you'd want your money that you've allocated, given budget constraints all over the place, to do some, to catalyze something or to do something that wouldn't have otherwise happened anyway. So you'd want your money in whatever form to be additional. To give an example, um, housing. We have huge levels of housing need, whether it's affordable, whether it's social, whether it's supported. At every level of the housing ladder, there is a shortage of decent, affordable housing. In certain parts of the country, the cost of house, the cost of the house doesn't allow much of a financial yield on it, particularly if you're trying to let that house out on a level of rent that's equivalent to housing benefit. In other words, somebody who can't doesn't have a job and needs the housing benefit to pay the rent. In order to do that, you probably, in certain parts of the country, Southeast being an obvious example, you can't afford, you won't get a financial return that's commensurate with anything market related if you're providing that housing at low, modest rent levels. So some level of support is needed. Now, whether that comes from philanthropy, whether that comes from government, but it should be enabling the rest of the money to achieve not necessarily a full-blown market return, but an acceptable return. So that would be an example of a structural situation where you do need some crowding in of money. There'll be examples where you're wanting the risk level, is perhaps a bit too high. If we think, I mean, the corollary would be you know, in the venture capital investing space, government has schemes like the EIS and the VCT that give the investor tax relief. Well, that is a subsidy for the additional risk that that investor is taking because they're putting money into very young companies, many of which won't succeed. Well, you can read across, I think, from that to the social sector and social need and say, well, if you're funding younger organizations from the non-profit sector that maybe don't have the track record, there is a higher level of risk around that. By definition, they may be trying to do great stuff, but there's a higher risk. I mean, children's care would be a, for instance, in my book, so we've got 85% of residential children's care provision in this country, in England, is delivered by the private sector. The private for-profit sector. There are debates going on about the level of fees being charged for that. You know, each looked-after young person, each of those 17,000 people cost the public purse something in the region of £250,000 a year. Big numbers, over 4 billion for those 17,000, very, very disadvantaged, vulnerable young people. We have outsourced that to the private sector. There are attempt, and there's a feeling that the the whip hand is with the private sector in terms of what they can charge, uh, and therefore the profits that they can make. And there's a I think a valid concern about that. How do you stimulate a change in the supply-demand balance? Well, you need more voluntary sector organizations to be providing. It's residential care, you need a home, you need capital to buy the home, and for the working capital to employ the teams, etc. That is a scenario where smaller, newer voluntary sector organizations who need support, financial support to engage in this sector for the greater social purpose or good, well, the capital needed for that will be higher risk capital because those organizations are newer, smaller, they need more than money, they need support as well. But that's that's an example for me where, again, if you want to do that from a policy perspective, if you want to change those dynamics, you need some higher risk money, whether it's philanthropic or governmental, to support that transition.

SPEAKER_02 32:54

Yeah, that's really interesting. And I can see, as you say, absolutely, from a policy perspective, the argument then for seeing social investment or impact investing as a way of bringing capital in to develop on the supply side, so that you have voluntary or at least kind of socially motivated providers. I I guess one question for me would be then along with that, does there also need to be some attention given from a policy point of view to the role of the government as purchasers of those services? Because again, it feels as though if they supported the development on the supply side of a whole new raft of providers that you know that potentially were more socially motivated, but then were still commissioning or procuring services in a way that prioritized simply lowest cost or in a way that commercial providers were always going to win, that would seem to be a disconnect in terms of policy thinking. So, what what do you think the government can or should do in terms of I at least, you know, if not levelling the playing field, maybe even giving an advantage to socially motivated providers?

SPEAKER_00 34:01

Well, and and indeed in in Scotland and Wales, there have been indications of preference for non-profit providers. Um there was a very I mean in children's social care, as you will know, there was a very comprehensive, I think very good report led by Josh McAllister, who's now a Labour MP, and and that looked at the whole of this uh and made a whole slew of recommendations, including around the commissioning process. Because you're absolutely right, you know, the monetary bit helps uh might help address the demand-supply balance and therefore and drive better outcomes for those very vulnerable young people, but it needs to be a part of a whole system change of which commissioning, a focus on outcomes, what happens to those young people and the support they get after they become 16, 18, depending and transition into adulthood, the leaving care, which is in many places a cliff edge. So there's a whole slew of system-wide change that needs to happen. And I think my point is that impact or social investment and impact-first investment can be a piece, but a small piece, but I think possibly an important piece of a much bigger change. Uh uh is not the answer in of itself.

SPEAKER_02 35:27

And and insofar as you can uh gaze into a crystal ball at a point when there's still lots of political uncertainty at the moment about which direction this the new government will go in, do you get a sense of what their thinking is around this whole area of the involvement of the private sector, but also, I guess, the the charity and voluntary sector or the social enterprise sector in public service delivery? Do you think there will be continuity with what's happened over the last decade or so, or do you think there will be any kind of significant changes of policy direction?

SPEAKER_00 36:00

I I don't have enough of an insight to give a decent answer, to be honest, Roderick. I mean, I'm encouraged by the fact that I know there's been uh engagement with the impact investing and social investment sector by the new government, so I'm encouraged by that. I mean, clearly we've seen a budget which and you'll have seen some of the press about concerns of social care providers around the, you know, it's legitimate to increase wages and minimum wage legislation, it's it's legitimate to increase taxes through increased national insurance contributions by employers, but but there's, I mean, this takes us off topic, so I'll stop. But there's quite a concern in the non-profit social care provision sector that the amount of money that it's going to cost that sector um through these changes versus the amount of extra money that's going into the sector, there's a big disconnect between the two. And uh and a sector that's come out of COVID and cost of living and Brexit, and you know, uh it's really quite worrying. But um, but that's a that's a separate topic.

SPEAKER_02 37:11

Very front of mind and kind of fresh in the mind for for lots of people. And I think very true. On the one hand, the supportive words and actions towards the voluntary sector and philanthropy and social investment are welcomed, but then if if they're kind of outweighed by changes that are quite understandably made in other areas that make life more difficult for those organizations, it's sort of hard to connect those two things together sometimes. I guess that sort of zooming out slightly from uh from this discussion, it makes me think, you know, one of the things that feels very um obvious about certainly the the impact investing sector in the UK is that it is in many different uh aspects kind of very closely bound up with government policy and particularly, you know, the the government's approach to uh creating public service delivery markets. I guess my question is, you know, does that necessarily have to be the case, or do you is it different in in other places where you've seen impact investing take off? You know, is the is the the UK unusual in that regard? And also does it bring a particular additional element of political risk because you are slightly beholden to policy decisions that aren't necessarily within your your power to control?

SPEAKER_00 38:25

Yes, I mean yes, on both. I mean, so the UK is reasonably unusual in the extent to which, starting back in the 1980s, public services were outsourced from government agencies. So government still is the commissioner, the procurer, but the delivery is with the private sector, with the voluntary sector, and in a modest number of situations, I mean the NHS being the big exception to this point, the provider is not the public sector and the public sector employee. Um, so we are unusual as a country in that, and we've talked about children's social care as an example, among many, many others, of that. In terms of so so we are unusual. I I think the risks therefore are there because policy change is a risk, and if you look at where private capital, be it for profit, be it impact first for profit, has tended to focus, have been on those areas where the statutory duty on the public party to provide support is firmest. Um, I mean, I I I said in the intro I ran an equity-focused um impact fund. It was investing in private companies that we felt had a sense of purpose. I think it was an impact first fund under the Harvard definition. Um, but um, but um we we looked at a range of organizations and we did invest in children's care uh in the belief that finding a middle path was important. We looked at other sectors, but it was easier to look at sectors where the local authority or the public entity had a statutory duty to provide. If I read across to education training skills, take apprenticeships, take in-work training by the government, that's a much easier area for policy to change. And in fact, over the last four or five years, there was there's an example uh post-my time of running that fund where there was an unfortunate example of an investment that had problems, in fact, it went wrong, because of policy change. So, what that means is that you will either shy away from those investments or you will feel nervous about those investments, or you will value the entities, a training company in my example, you should value those very lowly to take account of that risk. Uh so that yes, so yes is the answer. It limits the policy risk. If you if you think carefully about policy risk, it should limit your willingness to do certain things or invest in certain places, or the price at which you will invest.

SPEAKER_02 41:34

Yeah, really, really interesting. Um, I've just got a couple of different points I'd really like to get to. It's going to involve a slight bit of jumping around. I hope that's okay, but I just wanted to make sure we talked about them. Um, one was you know, we mentioned very briefly in passing before the potential role of organizations that have philanthropic assets in in um making impact investments or social investments. And I know lots of people listening to this will probably come from the world of philanthropy and will either work within the foundation world or have experience of it. And there's a lot of debate at the moment about how foundation um endowment assets could be used. What's your view on the potential to tap into that market as a source of impact investing or social investing from a market point of view? Is it actually a meaningful pool of capital? And and is it, or is it that it's a small pool of capital, but it could kind of set an example of uh of how these kinds of you know investments could be mainstreamed?

SPEAKER_00 42:34

In both both the funds I've been involved with, charitable endowments were uh important investors, are important investors, were important investors. The 300 largest charitable endowments in the UK, I think, have something like in excess of 70 billion pounds of assets. The amount that's been allocated to impact investing in the in the impact first sense is pretty modest. It would be fantastic, and again, against the backdrop of what we talked about public services, public sector, shortage of government money, boy, wouldn't it be fantastic if more of that capital or a greater allocation of the endowment capital, and there are good examples in the US of this happening amongst some of the very major US endowment funds, more of that could be allocated to particularly to the impact first space. I mean, the the with impact, i.e., market return space, uh, which is ESG responsible mainstream funds, uh that that isn't going into this point about additionality and tackling the extra need. So you know, in my mind, the the the the two places uh which have significant Capital that would really shift the dial were they to be able to allocate a bit more, are the private endowments through their endowment capital and local government pension schemes, which have in excess of 300 billion uh of pensioners' money and have a place-based, often a place-based, etc. etc., focus. So those are the two areas where if we could find a way to mobilize as a sector, and there are there are good examples of investment from both of those in the sector, lots of good examples, but boy, wouldn't it be fantastic if we could manage to do even more.

SPEAKER_02 44:44

And just, I mean, you might not be able to answer this question entirely, but what's your sense of what it is that's currently holding that back? Are there actual practical barriers in in place, or is it just a lack of awareness and understanding that's the main issue?

SPEAKER_00 44:59

I I think, I mean, I think it's a combination of things. I mean, one is you know, a very strong sense, rightly so, amongst trustees of those organizations about their fiduciary duties, the importance of maintaining the real value of endowments. Well, I mean, it depends obviously on the constitutional documents of each of those endowments as to as to what their financial goals are. But I think there's a there's a innate and legitimate conservatism. I think there is a concern about fiduciary duty, and again, the Impact Investing Institute did a piece with uh with some leading law firms around this and how actually you can reconcile the two. But it it would be fantastic and it would be transformative if we could find a way, not of all of it, but of course not, but but of more, because five percent more allocation, if the denominator is 70 billion or 300 billion, is a very big number and is a is a number that could really help contribute to improving social outcomes, social uh return.

SPEAKER_02 46:06

Um and then one of the other things I wanted to ask is sort of thinking particularly about impact investing as you've defined it, and thinking about the instances where we're talking about investment in for-profit companies or or organizations, but with a view to generating some form of social return or where they have a social purpose. You you touched on this before and you mentioned phrases like greenwashing and purpose washing. I wondered to what extent we should be concerned about the risks that without sufficient safeguards or or the appropriate measures, or perhaps you know new for legal forms that kind of enshrine social purpose, there is a danger that it's possible for not very well-intentioned actors to claim some of that social purpose in order to get reputational benefit or to deflect criticism, but without genuinely delivering it. This is obviously something we've seen in the environmental sector, and there are concerns about it. Do you think there are kind of valid concerns about that in the broader context of impact investing?

SPEAKER_00 47:08

Yes, I think I think there are. And and and with as with everything, you know, that there are hopefully only a handful of really bad actor examples, but then there are lots where it's skin deep in terms of of the impact. And then there are some very positive examples of organizations that are really committed to to driving or trying to understand, measure, and drive genuine impact. So, yes, it and and and unfortunately, the bad news stories tend to hit the headlines more easily than the good news stories, but that's that's that's that's just a fact of life. But it does, it does, you know, the bad news stories therefore do inhibit people. And and again, I think it comes back to the words we've used, which is transparency and being, if you're an investor, being very clear what you're seeking to achieve, how you're seeking to achieve it, whether you consider yourself to be generating market-based returns, whether you consider yourself to be sub-market in some way, and just being honest with your investors so that the expectations are set right. I think I think the transparency and and kind of clarity points really are the key ones. And and it's valid to say I'm going to generate market level returns, I am an impact investor under the definitions. I believe in lockstep, i.e., that there's no conflict between return and impact, and that therefore, if that's the case, the impact will survive my ownership because it's embedded in the organization. My point is that that is a more limited impact. Impact will be bounded by the commercial return considerations. It doesn't mean it doesn't exist, it means it's bounded by it, because the primacy will be given to the long-term financial return for the investor. Be clear about that. If that's what you're doing, just be clear about that. You know, the studies again, Harvard and Stanford and others show that if you take the additionality point and you use that, that you would expect a lower financial return. Because the and and it would be harder to make those investments because you've got a third dimension called impact that you're not as not automatically kind of saying it's embedded in what we're doing, but it there are trade-offs. And again, in all the investments I've been involved in in this space, I would argue there's a trade-off. We're either being asked to take a bit more risk or we're being asked to accept a lower financial return, both in the pursuit of greater impact. And then you've got to measure whether you so that's the intention, and then you've got to actually try and find a framework to say, are we actually delivering that?

SPEAKER_02 50:09

And and in terms of the safeguards against these kinds of risks, do you think that the various different ways in which people have created new legal structures that allow purpose to be enshrined in some sense, like B corporations, do you think that is a you know useful avenue that can help people to have more confidence? Or do you think that you know that actually we need to find other methods of allowing a multi, you know, a multiplicity of different types of organizations and legal structures to be part of the impact investing market?

SPEAKER_00 50:40

Well, I think I think B Corps are fabulous, and I think they're a very positive thing. And and you know, there are, I think, around 2,000 B Corps in the UK, um, which is fabulous. The process of certification to become a B Corp is rigorous and onerous. So with that, the intent of any organization that puts it through that, puts itself through that, has made a very clear statement of intent that speaks to its values and speaks to the values it wishes to communicate both within and without the organization. So I think that's incredibly positive. I I guess I'm slightly nervous of some sort of independent regulation because I I'm never convinced that regulation is always the answer because it adds another layer of complexity and possibly doesn't necessarily help. I think it's it's about if I take the B Corp, B Corps have have gone on that journey, are on that journey, and they will be inclined to be transparent and and own it in terms of what's working, what's not working. It's sort of almost intrinsic within the culture that they are aspiring to, and and in many cases, in most cases, delivering. So I think that's probably the better way to go. And I think then as an investor or as an outsider stakeholder in those organizations, it's about examining that in the micro. I I I so I think yes, you can embed purpose in your articles of association as a company, you can become a B Corp. Uh in the US, you could be a public benefit corporation. Um, you can do all of these things and embed purpose in it in your organization, in your DNA. And I think then if you communicate that and you measure to the best of your ability, I I'd stop there rather than have an external regulation element added in.

SPEAKER_02 52:43

Yeah, absolutely. And then just one final question I wanted to ask, and this is, I think, a big question, but maybe looking for a a relatively sort of brief answer if it's all that's possible, which is just at the absolute macro level, do you think over the long, long term that there's that it's realistic to have any sort of hope or expectation that the principles that we're currently trying to explore through impact investing or sort of thinking about the social elements of return and social outcomes can become essentially more the norm rather than the exception within mainstream uh investing. And that actually the more we think about the long term, the the current distinction between thinking about you know public good or social good and investment return actually becomes more blurred.

SPEAKER_00 53:31

Yes, I think I think on a positive note, I think it can. I think it will be, though, for the mainstream bounded by the profit-first limitation. For as long as quite legitimately, make you know, business is looking at its commerciality and its commercial return, investment is looking at its investment return, for as long as institutional investors, private investors are comparing the different investments that they have with each other and saying, oh, well, that one's not doing so well, financial return. Why is that? For as long as the mainstream is focused on the commercial returns, which is legitimate, then the social or environmental returns that we can generate will be to an extent bounded. So I think my answer is it it's a it's a slightly woolly one, but it's it's nuanced around the yes, there is a universe where that applies, but there's another universe where trade-offs exist, and there's another universe where there is no financial return, and therefore philanthropy, which is obviously I'm talking to an expert, um, it is needed.

SPEAKER_02 54:47

And I think no, that's really useful in terms of I think clarifying those longer term expectations. Just remains to say thanks ever so much, Scott, for finding the time to come on the podcast. Really great to have a chance to talk about all of this. It's definitely a topic that we've kind of hinted at here and there on the podcast before, but probably haven't covered in in that much detail. So it's great to really get into the weeds on it a little bit. Um, I'll put links in the show notes to places where people can find um various things that you've mentioned, some of the reports and research um that they'll be interested in. Um and just remain here to say thanks ever so much and you know, all the best for the future.

SPEAKER_00 55:20

Well, an absolute pleasure, and thank you, Rodri. Very nice to talk to you.

SPEAKER_02 55:32

Okay, well, my thanks again to Scott for finding some time to come on the podcast. It was really great to connect and have a chance to talk to him, um, as I say, about a topic that we kind of you know danced around the margins of quite a few times on the podcast, but it was great to have a chance to really get stuck into it. Um I'll put links in the show notes to places where you can find out more about what Scott was saying and also some of the topics that we discussed. I'll also put some links to places where you can find out more about what I've written on related topics. Um, and if you're interested more broadly in issues around philanthropy and civil society, as ever, do check out the website whyphilanthropymatters.com. Lots of articles there and also guides to various kind of thematic topics about philanthropy, lots of news updates and also all the back issues of this podcast. If you like the podcast and you've got ideas for other people that I could interview uh or topics that we could cover, do get in touch. I believe that's how this uh conversation with Scott came about. Somebody got in touch and suggested it. So I definitely do follow through on lots of these things and they result in some some really great episodes. So please keep those suggestions coming. If you want to follow me on social media, you can do that. You can still find me on LinkedIn, pretty active there. And also, like everybody else, I'm now paying more attention to Blue Sky. All of a sudden that seems worth doing. So I'm enjoying trying to build up a following and a follower list on there. So please do come and find me and join the fun. Other than that, it just remains to say like, subscribe, follow the podcast. Do tell any of your friends or colleagues that you think might be interested about it, because word of mouth really helps. Leave us a nice review wherever you get your podcasts, because that also helps. Uh, and I will see you next time. Bye.