When you invest socially, is your intention to gain or give? Premal Shah, President [and co-founder] of the social lending platform Kiva, asked this loaded question to a packed audience at this year’s Marmalade session on people-powered social investment.
Answers, however, were not immediately obvious but could have big implications for the future of social investment. Individuals are different to other social investors and don’t always wear their motivations on their sleeves. Whether charities and social enterprises favour these individuals and what they provide that’s unique from other investors, is still unclear. How we reach out to these people will require new ways of thinking and behaving. To answer these questions about the crowd, why not ask the crowd, and that’s why Big Society Capital’s new CEO, Cliff Prior, hosted a workshop session on people-powered social investment this year. So what did the Marmalade crowd find?
Motivation matters: the dynamic between head and heart
The Marmalade crowd suggested that a better understanding of motivation is key to unlocking individual social investment for large numbers of people. As a social investor, if your intention is to gain, does this mean you will only ever invest in low-risk investments with a reasonable return? Similarly, if your motivation is to give, then wouldn’t philanthropy be your preferred choice? Where does this leave higher-risk, potentially higher impact social investments for individual investors?
There is a growing body of research into what’s been called ‘Philanthropic Psychology’ that could help us understand this better – for instance, we know that spontaneous altruism is a result of empathy, rather than a desire for reciprocity, or in other words, the decision is driven by the heart not the head. Does this mean that building empathy through connections with the human stories is key to encouraging people to make social investments? Complexity increases with the possibility of combining a social and financial return. Another field of research could help - ‘Behavioural Finance’ – that looks at how our understanding of psychology and emotions can help explain the financial decisions we make. Work by Barclays applies these frameworks to impact investing, finding that it can be very difficult for people themselves to understand their own preferences for balancing social and financial objectives. At the moment, this work has focused mainly on high net worth investors – we know very little about how these dynamics play out for individuals with much lower levels of investible wealth. Ethex, the positive investment platform, are currently engaged in research on behalf of the Social Investment Research Council on the motivations of individual retail investors to shed light on some of these unknowns.
The future of social investment: Individuals, not institutions
In the long term individuals could be a larger source of capital for charities and social enterprises than institutions – there are around 4.8 million households in the UK with liquid investable assets of between £12,500 and £50,000 – but what matters is whether this is the right type of capital the sector needs.
If we succeed in increasing people-powered social investment, what does this mean for charities and social enterprises raising investment? Individual investors could bring something unique to the sector. A cheaper, longer term, riskier capital that could make finance accessible to new group of charities and social enterprises who may not have been able to access mainstream or social finance before.
People-powered social investment could also be crucial for supporting innovation in drastically different models of using finance for social good – this type of investment could support longer term, riskier models that other types of investors wouldn’t have the ability or appetite to engage with. For example, Kiva Labs is exploring ways of enabling individual investors to provide loans for higher education tuition for students across the world, where other forms of finance are not an option. Student loans require long terms and grace periods. Most students have little credit history or collateral. Peer-to-peer lending by individuals is filling this gap that institutional investment can’t or won’t.
Reaching out to the crowd
Even if we find the crowd, they still have to be reached. The ways of doing this will depend on whether the crowd is comprised of millennials looking to use their finances to support their values or retirees with extra income looking to get a little more social bang for their buck. What the Marmalade crowd did find was that building trust and confidence amongst the crowd is key. Who would people trust more about messages around social investment and in what stages should these messages be delivered? Is it institutions or large corporates? Perhaps celebrities? Our crowd felt peers could be the strongest influence. Any people-powered social investment that starts to get taken over by financial institutions (a claim being made about crowdfunding in the United States) could start to look less appealing to individuals.
What’s clear from conversations on the day, and from our wider engagement with sector, is that people-powered social investment could provide access to a new type of finance to charities and social enterprises. However, if we want to reach the masses, we need a much better understanding of what might make people engage with social investment, when the heart is more powerful than the head, and when this matters.
At Big Society Capital, we’re working on a number of projects to help understand this, including supporting research by Ethex, establishing the first crowd match fund and looking into the viability of making social investment through pension funds. We’re therefore very keen to keep the conversation going about people-powered social investment and learn of the interested community.
Please contact Camilla Parke for more information.
 Source: Wealth and Assets Survey, 2014, Office for National Statistics. Investable assets defined as financial wealth net of financial liabilities