It is hard not to dream about new financial catalysts for social change while in the UK – the British are not afraid to lead in this area. Maybe London’s position at the center of the financial world for centuries has helped the UK to become a leader in innovative social finance. The first major innovation I had heard of coming out of the UK was the social impact bond. I’m a big fan of the social impact bond because of the fact that investor return is linked to progress against social goals. In the enterprise context, companies may agree by contract to certain social goals and may be required to track and report on progress against those goals, but investors are paid regardless of whether the goals are met. I wonder if investors would be more likely to hold companies accountable on social performance if the investor’s bottom line was also implicated.
This week, I was introduced to a second major innovation – Big Society Capital (BSC). BSC is a 600 million pound government sponsored fund that is financed by money from unclaimed bank accounts in the UK. BSC provides capital for other funds that are making direct investments to social sector organizations and businesses. In addition to providing a large pool of capital, BSC has added a very large voice to some of the definitional conversations in this field. Because the BSC is essentially investing public money, it must clearly articulate what for-profit entities it considers to be a part of the social sector.
The BSC’s pursuit of a definition of a social enterprise begins with the law that brought the BSC into being. The statute establishing the BSC compels it to fund organizations that “exist wholly or mainly to provide benefits for society or the environment.” This definition provides the BSC with a starting point of what criteria a social business must meet. Not only must a social business exist primarily to provide benefits to society, it must also lock this commitment into its foundational documents and its profits must also be primarily devoted to social objectives. Payouts of cumulative profit after tax to shareholders must be capped at 50% over time; all other cumulative profit after tax must be reinvested in the business or applied to advance the business’ social aim. Among other requirements, social businesses must “articulate, measure and report” their social impact and keep compensation in line with market practices for social sector organizations in general (e.g. British nonprofits). You can read more about the BSC’s definitions here.
To my knowledge, this means that BSC is the largest pool of capital in the world that is investing under these kinds of principles. I wonder that happens to unclaimed bank accounts in the US?