Out of nowhere, as often happens in this “internet world”, I was contacted by a marvellous (I only found that out when I met her) woman called Gayathri Radhakrishnan. She had seen a presentation I gave at the Skoll World Forum on the internet concerning social entrepreneurship in the Balkans and in this connection became very interested in, and subsequently read, our “Catalyst in the Balkans” blog. Her purpose in contacting me was to ask if we would have any interest in a “Catalyst in the Middle East” blog, and would I meet her for lunch on 31 December to discuss it?

I had a rule about this holiday, one which I have too often violated–NO WORK WHILE ON HOLIDAY. Like all good rules I decided to temporarily “park” it and see her. What a delightful, inspiring and competent individual! I will spare you some of the mundane details, but the key conclusion was that she agreed to be coordinator of this blog, which we will be posting onto our website shortly.

Gayathri comes with superb credentials to conduct this role. First, she is an intelligent and sensitive person–essential in the region she will be studying. Second, she has a Masters from the LSE with a focus on Development and then several prestigious internships and fellowships. After a brief period with the Department for International Development (DFID) in the UK she moved to a private development consultant, where she became fascinated with private sector involvement in these areas–which turned into interest in social enterprise. When her partner was posted to Jerusalem to undertake some work on behalf of DFID, she began to search for projects, which is how she found us. Third, in many respects, Gayathri is an outsider to the region, thus giving her a particular but objective insight. Finally, she expects to live there for at least two years!

One of the flaws of the “Catalyst in…” programme is that folks like me fly in and out, over short periods of time, and it makes it difficult to get the most value out of the blogs. By undertaking this on a longer term basis, Gayathri will be able to make a far greater impact. Also, we have been approached by other Middle East-based observers, who perhaps lack Gayathri’s background, time or experience. We encourage those and others to submit posts about social enterprises and businesses in the region and in a few days will post how to do this–if anyone wishes to make contact in the interim, please contact me on rod@catfund.com.

If any of you know anybody who may have an interest in this, please get in touch. I cannot think of many regions in such desperate need of good news and positive stories about constructive human endeavour! They are out there and need the oxygen of publicity!!

Rodney Schwartz

First, there have been dozens of studies over the years, all of which prove more or less the same thing. In general, SRI funds perform in line with other funds–no better, no worse. Thus the sponsors of the study wasted money (I hope not too much!) to document what we have already known for years. It seems this is part of a petty little domestic French squabble, as the FT article goes on to quote a study published in France by a rival from Altedia which suggests SRI outperformance. It seems the Edhec study is meant as a riposte. Look, the SRI movement is so new and the styles are each so vastly different that to suggest that any study can be conclusive i grossly misleading. Perhaps one day a conclusive study will be possible but today the only supportable conclusion is that SRI-type strategies do not enhance investment performance.

In an apparently desperate attempt to make the studies findings seem relevant the study hints that “it would be misselling to to promote SRI based on performance, because it is not there in the figures.” Wow, what a searing insight! It would be misselling for any investment style to make such a claim–and they generally do not. There is a view that perhaps, over time, morals and returns may go together, but this is more of a wish than a prediction. Even Professor Amenc says, “there could be a positive effect from SRI selection (over the longer term)”.

To suggest the SRI community makes different claims is a cheap trick to try to make the conclusions of their report seem more interesting than they actually are. Such a trick is often employed in desperation in a debate. I recall an episode from The Simpsons (the American cartoon) which illustrates this well. Homer Simpson (the lead character) is running to get elected as Sanitation Commissioner, against the experienced Ray Patterson. He first falsely suggests that Patterson is a drinker (an argument he implies but does not support) and then asks the audience, “Do we want old man Patterson with his finger on the button?”. The fact that there is, of course, no nuclear button used in local sanitation is irrelevant–the headline of the newspaper the next day reads, “Simpson Wins in Landslide”.

My final point is the most important, and the one that the SRI community needs to reiterate over and over again. While the industry produces financial returns that are indistinguishable from mainstream funds, it does produce non-financial or social returns that are vastly superior–and it delivers these returns for free. In short, investors in SRI funds get something for nothing. Now that would be an interesting story to tell–why isn’t that on the front page?

Rodney Schwartz

Hello,
My name is Han Ji Oong.
I’m a student of Pusan National University in Korea and I’m impressed by your opinion.
I’m studying about the plan that not only Korean social enterprise achieve a sustainable growth but also the moral investor gain high return through establishing social stock market.
In the flow of recent financial crisis, I think that the settlement of social stock market in Korea and the world is essential for the expansion of social benefit and redistribution of income to social weak.
But social enterprises of Korea are so small that they can’t be listed in stock exchange. And the investors also are not familiar with the culture of donation.
So I am wondering whether the social stock market that you plan to make can be founded and work effectively in Korean custom or not.
Also if there is a possibility of successful social stock market, could you tell me the solution about listing of social enterprise and supposing the stock price index?

Dear Han Ji Oong

Best regards,
Rod Schwartz
CEO, Catalyst Fund Management & Research Ltd.

With CICs, a great deal of effort is expended to try to protect the “community’s” interest utilising another well-intentioned device, the venerable “asset lock”. It sounds very serious and air-tight, but frankly, even experts agree they can be circumvented–but this is another matter. One aspect of the asset lock is that the returns to investors are limited to 500 basis poiunts (5%) over the base lending rate. At current rates this is 7%. Now this is a very nice return, but I imagine well-below market for the types of projects and enterprises being funded in CICs. The result is that the availability of such finance, already severely limited, will simply dry up.

I do not think this is what the Government intended–in fact I am sure it is not, but it ought to be fixed AND SOON, especially as rates look as if they may be heading even lower. It is one thing to limit returns in order to prevent expropriatory payments which undermine the asset lock, it is another to allow a crazy circumstance to persist, where the limit is preventing capital from coming into the social enterprise sector.

There is much in the CIC legislation which is badly done and would be difficult to fix. This would be easy. C’mon guys!

Rodney Schwartz

I reviewed in my own mind some of the others that achieve the support of stars, and how they go about it. Two came very quickly to mind. Belu Water, whom we have advised in the past, are well supported and even financially backled by such social investment luminaries as Gordon Roddick and Ben Goldsmith. Another, which I have been hearing quite a bit about lately is the Bright Ideas Trust, supported by a wide variety of organisations including: Bank of America, Herbert Smith (the law firm), Octopus Investments and the Prince’s Trust. How are these both able to attract such notable support? Do all three have anything in common?

Well they are a homeless charity, an ethical bottled water company and an organisation which helps young people to start up businesses–no common thread there. The Bright Ideas Trust is very recent, Belu has been going about 5 years or so while Emmaus started in France in 1949 by Abbe Pierre (also known as Henri Groues, who passed away last year)–no pattern yet. In fact, as I think about the style of organisation, its leadership, its form of operation etc. no obvious common themes immediately emerge–these appear three incredibly different organisations.

What does become apparent, but only after reflecting on the three for quite some time, is that their supporters tend to match the organisations and their distinct and unique styles. Each in turn has leveraged what they are and who they are with a base of supporters that suits them. At the Bright Ideas Trust, many of the supporters were keen to back a young black businessman, who himself was a bit famous, having emerged victorious from the UK TV programme called “The Apprentice”. In doing so, Tim Campbell won a one-year apprenticeship with Alan Sugar (a successful UK entrepreneur) and a serious following. He has shown flair and resourcefulness in converting this into his new passion, and drawing in those who already share, or wish to share in his vision and bask in his reknown.

Belu Water, which operates as a social business or enterprise, is attempting to build a successful, valuable and profitable company (although to benefit water-related charity projects around the world). In addition to the two folks mentioned above, it has secured funding from Biginvest (the investment arm of The Big Issue), London Rebuilding Society and has a “who’s who” of the UK social investment establishment on board in one form or another. These are attracted by the possibility of creating a new kind of venture, one which uses the rules of the market to create value and wealth for those who need it most. Again, matching supporters with what it is.

Emmaus is less radical (and less modern) than the other two. It delivers a service that the Government is obliged to do, but likely to be unable to do so on its own. What Emmaus does is no less important than the other two, despite its more conventional orientation, and its supporters are by and large, members of the political establishment–or just the establishment. It too has found support from the best of those who identify with its message.

And this is the point. There is no one route to success, or the support of celebrities, helpful, in many cases, in achieving success. Organisations need to figure out what they really are, get good at it, aim high, and find those with whom the message truly resonates.

Rodney Schwartz

First, Coutts filled the real with some real people–unless of course they were all actors. (We used to do this in the old Lehman Brothers days, when we could not fill a room for a corporate roadshow–but that’s another story.) From my conversations with these people, they seemed serious entrepreneurs, some of whom have some serious cash to invest–and some genuine interest in the sector. Years ago, when all this started, Coutts probably could not have found (even if it paid them!) over 200 such wealthy and distinguished clients to fill a room. But now, in 2008, they came and seemed interested in the topic! In fact, given the cost of such events, it is unlikely Coutts, a well-regarded private bank, would have gone to the trouble and expense of hosting the event.

The fact is, like all such institutions, Coutts is responding to the interests of its clients. Our earlier post on BNP Paribas suggests it is not alone in recognizing this growing interest. This is very envouraging for the sector. For cash-strapped social entrepreneurs, the “hoofbeats of the cavalry” they can now hear are the sounds of these high net worth investors, possibly riding to their rescue. I saw more than a few such entrepreneurs engrossed in such earnest and serious conversations. Social business leaders should focus on finding such folk instead of wasting their time with charitable institutions and trying to convince their Boards of Trustees they “should” back them–those folks will take forever to convince. Go instead for the people who have made their own money–and control it!! And note, they can give you cash AND invaluable experience.

And finally, a reluctant cheer for the Government. Kevin Brennan, the new (ish) Minister for the Third Sector, attended the Coutts event as well as a host of events throughout the day (and spoke at our Third Annual Social Business Conference last week). His endurance is to be commended–as well as his party’s commitment to the sector. By continually “talking the sector up” they have pushed the social enterprise agenda higher up people’s list of priorities and demonstrated the value of what Americans refer to as “jawboning” (using your jaw movement–talking!). We too are endeavouring to “talk the sector into existence”, as my colleague Julia Meek regularly says, but lack their platform. This has not only been good for social enterprise in the UK but has also made a meaningful difference in how the British Social Business and Enterprise movfement is perceived abroad.

We can have a long debate on the reality as opposed to the perception, but the perception is very favourable and for this the Government deserves considerable credit. Thus perhaps all the fuss is worthwhile?

Rodney Schwartz

I confess, I am probably more than slightly jealous of the sort of fame people like her achieve–and a bit suspiciuous. In addition to the 17 books (I guess this new one will be number 18), she apparently has received 22 honorary doctorates–jeez. But when I get a bit beyond the petty jealousy there emerges a more fundamental disagreement with the RMK line. Her book focuses on large “vanguard” companies and “how they create innovation, profit, growth and social good” (the quotes are from the title). For examples she offers such names as: Procter & Gamble, IBM, Diageo and Cemex. The article highlights her description of an “amazing” process whereby IBM canvassed the views of its 140,000 staff in a three-day “web chat” and the transformation this would cause. Oh, come on!! Here my cynicism just spills over. Anyone who has worked for large companies knows the form of such exercises, we recite the slogans, wear the hats and t-shirts and then quickly get back to work so that we can return to the more practical (and we know more essential) imperative–making money for the company.

There is nothing wrong with this–this is what large companies are largely about–and I can accept this easily. I have no qualms with efforts to make such behemoths behave more ethically–in fact I am supportive of such efforts. I also do not begrudge attempts to sensitize workforces and I generally think such endeavours often yield positive business results, but puh–leeeease, let us not imagine that such companies will be the source of any social or ethical business revolution. They will not be the “vanguard”. Such change will only come from the smaller entrepreneurial organisations whose business models are fundamentally changing the way we operate–firms like Ben & Jerry’s and The Body Shop in their heyday, and Divine, the Phone Coop (see our recent post on them) and Justgiving.com today.

From a practical standpoint I can understand the desire to concentrate on large multi-nationals. Adjusting their behaviour even slightly can have a large positive impact (see our 29 August post). Also, consulting to these firms is far more lucrative than advising the tiny businesses we try to serve in the social business sector–and they are probably better and more prompt payers! But I think we have to recognise that from such firms will not, absolutely not, come social business leadership. They will copy models desgined elsewhere, or buy the social businesses themselves (like L’Oreal, which purchased The Body Shop).

The Obama revolution, cited in the article, came not from the large, entrenched party machines, but from the strength of millions of citizens voting, well before the election, with their wallets, and funding this new-style campaign. I think this social business and enterprise movement as well will be based on more organic, bottoms -up, efforts.

At the risk of being even more controversial, I also think it is infeasible for large companies to be “social businesses” as we understand them. We wrote about the problems inherent in size last year. They can be more social, socially-minded, more ethical, etc. but they will always be businesses first and foremost. The incentive structures and bureaucratic inertia of such structures practically gurantees it. If we are looking for great examples, I do not believe the SuperCorps RMK has identified are likely to be the place to look.

Rodney Schwartz

On a trip to Cairo this summer, I met a luminary of social entrepreneurship in the Arab world and beyond. At the second attempt, I thankfully remembered my passport.

An extraordinarily driven person, Raghda El-Ebrashi, was awarded the United Nations prize for Social Entrepreneurship in Egypt 2007. In the same year, she visited London to receive the “35 Under 35” award, set up by the World Business magazine, London, and the Shell Corporation. She was amongst 35 women from all corners of the globe, all under 35, who champion social business and impact through entrepreneurship. She has now won a string of awards, which appear not to interest her a great deal.

Coming from a well-heeled family, she started her vocation in the domain of community development at a young age. At just 24 (25) years of age, she teaches (Strategic) Management at the German University in Cairo while working on a PhD in social entrepreneurship. Driven by piety and zeal, she runs a social enterprise, Alashanek ya Balady Association for Sustainable Development (www.ayb-sd.org).

Alashanek ya Balady aims to develop the talents of young Egyptians through societal and environmental projects. The diversity of social offerings struck me straight away. The organization runs a host of ambitious community development programmes in impoverished areas, from the provision of micro-credit, to assisting poor youths in seeking work and helping children’s’ artistic talents to flower.

A social entrepreneur in a country where, by her own admission, the concept of social entrepreneurship is scarcely understood, let alone supported. She somewhat forlornly informs me that the government ministry responsible for the regulation of social businesses and enterprises, the rather quaintly named “Ministry for Social Solidarity”, does not legally recognize that entities with a social mission may make revenue. I begin to appreciate that governments across the region, and the world, can really facilitate the social value creation process by accepting the notion of blended value: “the idea that the value generated by any organization (both for-profit and non-profit) is financial, social and environmental and that these three constituents of value are indivisible from one another.” ( from www.socialinvestments.com).

At one point in our discussion, I ask about what many Egyptians and she make of climate change-related global threats. She is almost nonplussed, shrugs: the people she works with have far more urgent matters to worry about. At that moment, I begin to appreciate that the construction of a sustainable global society requires that those at the top of the so-called pyramid properly assume their responsibilities. Sustainable development is about so much more than grand emission reduction targets.

In spite of the lack of governmental and other sources of encouragement and assistance, El-Ebrashi has such a clear sense of purpose: she to wants to assist poor Egyptians to develop their own country. As she puts it: “The government and most Egyptians do not appreciate the human potential that is locked down by poverty.” She proudly informs me that Alashanek Ya Balady means “For You My (beloved) Country”.

Charles Kaye

EaKo is first of all a clever name. You could never get Eco, or Eko anything–these are already well used. But “EaKo” is based on the CEO (Kresse Wessling) and her partner’s name (which, I think was Edward, or something like that). OK, a bit cute, but clever for an ecologically oriented company.

Their basic concept is the re-use of materials that are thrown away, normally at considerable cost. Kresse is a fanatic about waste re-use. I will not go into all her ideas but some of those which are already in production are waste coffee sacks–converted into carrier bags at supermarkets that can be re-used. Also, EaKo uses decomissioned office furniture and discarded fire hose to make trendy handbags (the hose also being used for belts). These products I have seen, and are attractive–even trendy. Just tell me you would not want to have a handbag made of re-used fire hose, if you are a woman, or if you are a middle-aged man like me, would not wish to give one to your teenage daughter! EaKo has been clever and skillful to make these into trendy fashion items, with a keen attention to detail–a point too often overlooked by companies which are no less noble in orientation, but less successful because their products are plain ugly. Social businesses must not take customers for granted just because they “do good”.

EaKo is also effective in selling their products. They get high-end shops and supermarkets to carry their merchandise. This is about being effective in selling, a skill generally lacking at many startups, social or ecological or otherwise.

Finally, there are substantial “social” benefits as well. Not only do old fire hoses and other items get usefully re-used, but fire-fighting companies benefit as well. Delivering the hose to EaKo costs far less than it would to have these bulky items properly discarded at a high cost, but EaKo gives half its profits to the fire-fighters. Obviously the environment also benefits greatly.

What a great and simple idea–what a cool company!

Rodney Schwartz

The collapse of large financial players has truly called into question the very nature of unfettered free-flowing financial markets. Although the full cost of the meltdown is not yet known, we can imagine that initial estimates are likely to prove low and the bill will be picked up by the taxpayer. Government as well as the financial institutions bear responsibility for this calamity and both have had their credibility seriously undermined in the process. But the debts now being created need to be serviced and eventually repaid. Against this backdrop one can simply forget about expenditure on social programmes. Against this challenge social business and investment has a big role to play.

There is evidence this has begun to show up in investor behaviour. In a recent EUROSIF report it is noted that SRI Funds have, in just two years, doubled to EU 2.7 trillion. SRI Funds do have their place in the “ethical arena”, but we believe also have great limitations—most notably the fact that their portfolios essentially mirror those of mainstream funds. There are even more progressive developments, such as the first closing (at £57 million) in September of Wheb Ventures’ cleantech oriented second fund. Alternative Energy has been a growing recipient of investor funds, but there is also good news in other social venture sectors. In Canada, Renewal Partners, which has been making social VC investments for over a decade is raising its second fund. Back in the UK, Bridges will shortly launch the Bridges Charitable Trust, which focuses on “equity-like” capital, for social ventures.

UK-based Adili has, since its AIM listing, secured further funding for its own expansion, while Divine raised funding in the USA for expansion into that market. The Ethical Property Company (on whose Board I sit, in the interests of full disclosure) expects to raise up to £10 million of share capital in the next twelve months from UK and European investors, to fund future property purchases.

Yet these organisations are exceptions to the rule. While funding has increased substantially, although from low levels, the stock of commercially interesting social and ethical opportunities has failed to increase at the same rate. Statistics on this are impossible to come by, but as a firm which focuses on “helping social businesses to succeed”, it is our judgment that a great imbalance exists. Investors (both in the private and public sector) can inject funds at the stroke of a pen, but building great businesses takes time and effort. We are only at the earliest days of this process.

Unfortunately those firms which do make some progress are often quickly snatched up by buyers. In the UK alone, the last few years have seen the disappearance of great names such as The Body Shop and Organix Brands (into the clutches of L’Oreal and Hero, respectively). Such purchases have also come about as a result of distressed situations, such as of the very (by social enterprise standards) large ECT Group (community transport) by private firm May Gurney. These and other acquisitions are good for the atmosphere in the sector but will lead to fewer high-quality sizeable social businesses to absorb the new capital. If this persists, poor financial returns will follow, thereby discouraging future social venture capital investment.

What is needed are a couple of things. Firstly time—an item which few have, but is absolutely essential. Another vital ingredient is capacity building and incubation. In this regard I am referring less to the commendable but distinctly small contributions made by the global foundations such as Skoll, Ashoka or Acumen (based in the USA) or Swiss-based Schwab, but the general absence of those which offer sizable funds for truly scaling up an enterprise.

I have been very impressed with the efforts of the Netherlands-based Noaber Foundation, which has been recycling capital earned in the mainstream (the founders were part of Baan, the successful Dutch software firm) into social businesses. In the Government-backed arena there are few peers for MaRS, a fantastically bold and innovative incubator of technology and social firms, located in the heart of Toronto, Canada. I am also excited by similar ventures in the developing markets. Sao Paolo, Brazil based Artemisia is an impressive social business incubator, which operates in Brazil as well as Senegal and France. Recently I have become aware of similar initiatives in other South American and African countries. Perhaps the developing world can show us, in the west, how to do it properly, now that we have faltered?

Let’s see.

Rodney Schwartz