The idea here is to stimulate debate and test consensus for a principle we might call ‘M>R’. The Alternative Commission on Social Investment suggested that one defining principle or characteristic of social investment is that “the mission of the investee should be the principle beneficiary of any investment”. In other words, the balance of interest should favour the investee, not the investor. This could be called ‘M>R’ (M being mission and R being return to investor) with acknowledgements to Thomas Piketty. The French economist Piketty received much attention last year for his analysis of how returns to investors have historically outperformed underlying economic growth - aka "R>G" - a trend which leads to ever greater economic inequality


The application of capital is generally intended to create value. This may be a combination of financial or social (and/or environmental). The Alternative Commission principle proposes that social value should be of primary importance for an investment to be considered truly a social investment.

The social value (or impact) which is actually created as a consequence of an investment is a function of how well an investee delivers on its mission (or purpose). But assessing the effectiveness of social sector organisations is both beyond the scope of this work and a thriving industry. What is proposed here is to remind investors, investees, policymakers or other observers that when they seek to understand the social value created through an investment, part of that calculation should be to consider what happens to any financial value created and where it goes.

In an economy increasingly characterised by the polarisation of wealth, we cannot ignore the financial flows associated with a social investment, whatever the direct social value of the work of the investee. Even an investment which leads to revolutionary new health or environmental technology, for instance, may have a net negative social value if it also leads to greater inequality. An investment may save lives or save the planet while also making it a more unequal place. The overall net positive social value of any investment will be compromised if the greatest part of the financial capital created is flowing to High Net Worth private investors, for example, so exacerbating economic inequality in the UK.

We are not arguing against financial return accruing to wealthy investors. We simply want to shed light on how these financial flows should be considered as part of weighing up the overall value of a social investment. The rationale here is that first, a truly socially motivated investor will themselves want to understand this in order to ensure an overall net positive social value was created through his or her investment. Second, that bringing greater transparency to social investment will strengthen its credibility and integrity further support the development of an emerging movement.

The investors

In order to understand the financial flows associated with a social investment, we need to consider not only the rate of return but also the nature of the investor(s). Sometimes they will not be HNWIs or intermediaries operating on their behalf. Instead, they might be trusts and foundations, themselves operating in the pursuit of a social mission and applying returns on investments towards those purposes. Sometimes, under certain community shares models for example, the investors may be broadly representative of the population as a whole, or even less wealthy than the average UK citizen. In these cases, significant financial returns accruing to investors would not be exacerbating economic inequality.

Applications and solutions - a modest proposal?

How then might we, an investee or investor, ensure that the financial returns from a social investment accrue primarily to the mission? One tempting option, for debt-based investments, is the idea of an interest rate cap, with which we are familiar from the payday lending industry or in the context of the Private Finance Initiative, for instance. With equity investments, the CIC model, which places a cap of on profits being distributed to shareholders, may be one way to ensure that the majority of surpluses made possible by an investment are reinvested in the mission.

However, interest or dividend caps can be clumsy and blunt instruments. With debt-based investments, for example, there may be instances where the financial return generated by the investee from what it does with the capital is so high that even an interest rate of, say, 12% or 15% is still less than the financial benefit accruing to the investee. So while it may be tempting to propose the idea of an interest rate cap, or to limit equity-based social investments to CICs limited by share, such a flat, universal cap is problematic and flawed. Futhermore, as explored above, the nature of investors varies.

Perhaps then we could adopt a ‘Reference Rate’ as a benchmark for social investment. Perhaps initially only in the context of Social Investment Tax Relief (SITR) when, as HMT’s own analysis acknowledges, the benefits of the tax break will accrue disproportionately to rich men in the south of England - “investors tend to be male, located in the south of England and have higher overall income levels”.

But such a reference rate could still be exceeded if the investee and investor are able to transparently demonstrate how they agree that the investee still stands to benefit to a greater extent than the investor. Rather than a universal cap or regulation, no investment made above the reference rate could be considered social investment unless the investor and investee can show their workings. This would represent a sort of Code of Practice or high-level principle by which investors could either comply or explain, with the investee’s support, why they don’t comply. Such a reference rate could be based on:

  • Interest rates
  • RPI / CPI
  • HMT / EU reference rates
  • Growth rates across the economy as a whole
  • Growth rates across the social sector

We must surely assume that the economy is the sum of its constituent parts and small actions, every business and each investment together make up the whole. While we cannot effect change easily on a macro scale, we can all play our part at the local and micro level to help create a more equitable economy. If we’re not part of the solution, we’re part of the problem.

So if we are interested in social investment as a tool to help address inequality and want to better understand its impact or value, then in doing so, we need to take into consideration not only the effectiveness of the investee in delivering its mission or purpose, but also the creation of financial value associated with an investment and to whom this accrues. This implies greater disclosure of these financial flows and a reference rate as a starting point to help us understand whether ‘M>R’. We may need to work on developing tools to audit this equation. The difference between adding value and extracting value is extremely fuzzy, but getting people to question who benefits most from an investment is a useful exercise which can strengthen the discipline of social investment.