Impact of social investment

Tuesday 17 may 2022

Social business is not a business that has worse financial performance than commercial business. As many studies show, many social businesses actually perform far more brilliantly than the average commercial business. However, social businesses tend to have a longer timeframe than commercial businesses to start making a profit. Even after making profits, social businesses even require reinvestment of most of their profits into the company, so that more and more beneficiaries will be benefited.

Under these conditions, social businesses require different types of investors from social businesses. Social business investors need to incorporate this business model into their decisions. In the early days, social businesses often received investment from their own founders, who happened to have the capital to do so. In later times, many social businesses then obtained capital from grants from people or organizations who sympathized with or liked the idea of ​​social impact promised by their business models.

Recently, there are new types of investors involved in the development of social businesses, namely those who are labeled as impact investors, or investors who tend to invest in types that produce positive impacts in economic, social, and environmental aspects for the community. There are also social businesses that are financed by commercial investors, but are less popular than impact investors.

Investments that tend to have a positive impact are indeed promising. How come? If people usually invest to get the maximum profit, this type of investor seems to be willing to sacrifice that interest, by choosing to be patient, lowering the expectation of the magnitude of the investment return (because the majority of social business profits must be reinvested), for the greater benefit of society.

If the basic idea of ​​social business is blended value, namely the convergence between social impact and financial performance, it seems that this convergence has not really occurred in the cases they studied. In the heads of these investors, there is a logic of impact, and there is a logic of investment. Instead of seeing the convergence between the two, what is seen is the dominance of investment logic.

This can be seen from the use of commercial investment measures shown in the social enterprise reports studied. Meanwhile, in terms of the social impact itself, the measures are much looser, if not unclear. There are quite a number of social companies that do not even issue social impact reports at all. Some of those who have reported also only wrote their input and activities. When examined further, it is clear that there is an effect of investor pressure, and not just a matter of measuring social impact. harder.

If almost all cases of social enterprises studied have used standard financial measures; very few have used social impact measures that are recognized by global stakeholders. Social Return on Investment, the most popular, is only used by 4 social companies. Then, each social company uses a report that is designed for impact investing, and one that uses the B Analytics Framework developed by B Lab.

The researchers concluded that the logic of commercial investing is dominant, and that there is a disconnect between impact investing and the basic idea of ​​the social business movement worrying about the future of social business. Instead of becoming a force for social change, what is more likely to happen if this trend continues is the commercialization of social enterprises, and ultimately the use of the word 'social' behind 'company' is no longer meaningful. The most important sign of this commercialization is that fewer investors are willing to invest in social enterprises in the early period. They are more interested in investing their capital in social enterprises in the later period.

• Lead image from unsplash.