Social enterprises categorised

Social enterprises can be divided into three distinct business models, according to research by social investor CAF Venturesome.

The study is thought to be the first to categorise social enterprises. It identifies three ways in which a social enterprise's trading activity can relate to its social impact.

The first model describes enterprises that trade purely to make a financial return but use profits for a social purpose. Examples are for-profit businesses that run corporate responsibility programmes, or the bottled water social enterprise Belu, which gives a percentage of its profits to charities providing clean water in developing countries.

Model two covers enterprises whose trading activity has a social impact, but where a balance is struck between increasing social impact and maintaining a financial return. These include fairtrade businesses such as Cafe Direct and micro-financiers such as the Grameen Bank.

The third model describes businesses whose financial return increases in parallel with their social return. Examples would be farmers markets and wind farms.

One of the key strengths of the approach is that the categories are based on fact, not judgement. Identifying which model a particular enterprise falls into could help entrepreneurs assess the management skills they would need and help investors work out their financial risk and the potential social return.

John Kingston, director of Venturesome, said: "This is defining things according to the social impact they are achieving, not by their legal form."

He said there was still little clarity in defining different enterprise types. "If you use the same words to describe a multitude of models, at some point someone is going to come a cropper," he warned. "I don't want someone saying they want to build a social enterprise before they know what it really is."

Gareth Zahir-Bill, an investment manager at the social investor Triodos Bank, said the models would be useful in determining the driving force behind a business. "It is important to establish whether the managers are motivated by achieving a social agenda or only by ticking CSR boxes," he said

THE THREE MODELS

Model one a profit-making trading activity that has no direct social impact but gives some or all of its profits to charity

Model two a trading activity that has a direct social impact, but has a trade-off between financial return and social impact

Model three a trading activity that generates a direct social return in correlation to the financial return created.

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