Tempted by banks? Social investors are the better bet

To build a new financial market means supporting investors who take a long-term, values-oriented and client-centred view. Not-for-profits should resist the temptation of attractive rates at high-street banks, writes Rodney Schwartz

Rodney Schwartz says 'relationship banking' is more of a slogan than a genuine approach
Rodney Schwartz says 'relationship banking' is more of a slogan than a genuine approach

In the social finance sector, we spend a lot of time explaining to businesses that generate social impact the advantages of securing capital from social investors.

These, we argue, are more willing to take a long-term, client-centred view; furthermore, because they are positively motivated by the social impact generated, they have greater alignment with the goals of socially oriented enterprises than conventional investors, which can lead to many benefits, both tangible and intangible.

The fact that social impact investors value these non-financial outcomes is what underpins social finance. In conventional finance, investors seek to maximise risk-adjusted rates of return over a shorter and shorter time horizon. But short-termism, and the obsession with profit and return maximisation at all costs, are regarded by many as the underlying cause of the financial crisis. Social investors value social impact and are keen to support the businesses that generate this.

Unsurprisingly, this resonates with many enterprises that generate social impact. Their reason for being is not about profit maximisation; they are driven by a set of social objectives combined with a need for sustainability. Thus businesses that are oriented towards impact - often described as social enterprises - share their ethos with emerging social impact investors. They also express distaste for the ethics of conventional finance and a frustration with banks and their short-term behaviour.

It is a surprise, therefore, that a number of successful social enterprises have balked or hesitated recently over financing possibilities from social investors when mainstream banks seemed to offer only slightly better rates. Concepts such as 'values alignment' were quickly jettisoned in the pursuit of lower interest rates, even from what are sometimes seen as those evil high-street banks.

There are times when social investors are financially more attractive to social enterprise borrowers than banks because social investors value the social impact and make an implicit or explicit trade of risk- adjusted return for social benefit. Some recent ethical bond issues - such as the well-publicised Scope bond - would fit into that category. Socially oriented businesses such as the Ethical Property Company make it clear that equity investors are unlikely to do as well financially if they purchase EPC shares rather than stocks in conventional property companies. EPC shareholders explicitly trade off returns for the important social impacts generated.

But there is not always such a funding advantage. Sometimes banks offer very attractive terms. Housing associations, even the most ethically oriented ones, find the current glut of very cheap bank debt hard to turn down. Other large, socially oriented enterprises that we know also find it tempting. But we would urge them to try to resist temptation (unless the gap is ridiculous).

As we have seen over the past few years, banks do come and go, and even those that have not gone under will enter and exit lending markets at speed. Small and medium-sized enterprises up and down the country have learned that "relationship banking" was more of a slogan than a genuine approach - at least in the case of most commercial banks.

To build a new financial market means supporting investors who take a long-term, values-oriented and client-centred view. This might be necessary even when there is some short-term cost to be paid.

Rodney Schwartz is chief executive of ClearlySo, which helps social entrepreneurs raise capital

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