Social Capital Markets – On Impact, Measurability and Trust

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Social capital markets attempt to connect social entrepreneurs with impact-oriented investors. The ability to measure “impact” is still considered to be important in order to create such marketplaces, even though this measurability might often not be given. To create market structures that efficiently transfer resources from investors to entrepreneurs, an old resource rises anew – trust! This would be a lesson from SOCAP 2012.

The promise
A new understanding of value creation is at the core of a social capital market. This market aims to promote the mission of social enterprises by connecting them to sources of finance that bridge between the normally distinct fields of banking and charity. The social return on investment is to be considered as valuable as the financial return on investment. This aspiration comes along with plenty of challenges, the biggest of which is related to the question on how to measure the social return on investment. There might be a simple answer though: social return is not measurable where it relies on qualitative and subjective aspects such as health, education or security. Does this mean that any effort to create a social capital market is for vain? Certainly not. Even if the outcome – the social return on investment – cannot be measured, there might still be an impact. It is this social impact that legitimizes the social capital market – not the measurability of its social return.

Legitimation by Impact – not Output
The significant difference between a social capital market and the conventional capital market consists in the way both are legitimized. The former is legitimized by a multitude of social impacts, the latter by a single measure – financial performance. Capital markets also largely ignore their societal impact, i.e., negative externalities such as CO2 emission, water pollution and resource depletion. Social capital markets are more sophisticated as they internalize these negative long-term consequences and even build resilience to avoid such externalities.

 

Introducing a new currency: Trust
To function effectively, social capital markets introduce a valuable currency that has often been forgotten – trust. Trust not only reduces transaction costs, it may also accelerate the flow of capital to impact investments. Where entrepreneurs may prove their social impact by showing investors the progress of their work on the ground, it can complement or replace complicated metrics to measure the social return on investment.

A good example for this kind of investor-investee relationship is LGT Venture Philantropy. LGT guarantees the integrity and social impact of its investees when negotiating with larger investors for funds. The credibility of LGT functions as substitute for a hard proof of social return on the investment made. A similar kind of trust capital is built and leveraged by Kiva to capitalize small and medium enterprises in developing countries. It is this currency that will be crucial in the years ahead to enhance impact investments and entrepreneurial activity on the ground – and to validate the social capital market.

Currently, 300 impact investment funds, such as Good Capital, Acumen Fund and Blue Orchard are working towards the advancement of social capital markets. A remarkable plaidoyer has been written by Kevin Jones, founder of SOCAP: Social Capital Market Manifesto 2.0. nicely summarises the movement and its aims.

The question that remains then is simple. Do you trust it?

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