Raising Capital and Socially Responsible Mutual Funds

This week’s social innovation topic is “Capitalization and Impact Assessment for Social Innovation.” Each article covered this week focuses on the changing financial landscape of social innovation and the trends that are influencing how individuals, organizations, and government view ventures with social purposes, whether it be at their core or as a tangential activity.

Melissa Ip’s Social Enterprise Buzz article[1] and The Economist’s “A Place in Society”[2] introduce us to a changing landscape, driven in part by the demand for “private capital and skills to supply the basics of life and to get small business going” in parts of the world where it has been traditionally difficult to access capital and to scale production and distribution. The articles focus our attention on Kickstart International, a Kenya non-profit founded in 1991, that assists impoverished people through sustainable economic growth and employment creation, which is funded by Citi bank loans. These loans – which have previously not been available to rural farmers and families enables people to expand the production of simple tools like water pumps, creating opportunity for further economic development and wealth creation. This access to capital has not only created an entrepreneurial environment in these far off communities, but has fostered sustainable development in ways that communities were previously unable to experience.

The Stanford Social Innovation article “The Funding Gap”[3] was of particular interest to me as it outlines the various roles direct and intermediary investors plan in raising capital for social enterprises. The article explains while investors are beginning to understand how ROI can be realized through social-based ventures, “entrepreneurial energy is thwarted by a lack of mission-aligned early-stage capital for social ventures”. This may be because it is difficult for many foundations, philanthropists, and private sector investors to see how social ventures or hybrid organizations sit on the larger spectrum. As a result, two additional trends are occurring. First, managers are rethinking business and operational practices to reflect both social and financial returns. And secondly, innovation has occurred in the development of sources of capital. For this second point, we will examine one option more closely.

The Stanford Social Innovation article mentions that socially responsible mutual funds are beginning to pop up as an additional source of capital available for social ventures. Kiplinger financial and business services’s James Glassman touches on this more recent development exploring iShares MSCI USA ESE Select Index, “an exchange-traded fund that tracks an index of companies that it says follow high ‘environmental, social and governance standards’”.[4] This investment strategy to generate financial returns while tackling a social issue is a fast growing trend that provides investors with an additional way to “feel involved” in issues they are passionate about. Most mutual funds that have a socially responsible component adhere to a list of social, environmental, or even religious beliefs. These mutual funds normally hold securities that are important to socially-conscious investors and to corporate citizenship, but for fund managers it becomes very difficult to find stocks that will attract investors. One of the issues here, however, is that investors never really know if there investors are going toward supporting or mitigating social issues. While socially responsible mutual funds are an innovative idea to attract investors and focus attention on social issues, do you think this approach is more about public perception than trying to do the right thing? Are there screening issues with offering stocks which may be socially responsible? Is this really a good way to raise capital?

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[1] Ip, Melissa. Social Enterprise Buzz. “Citi Breaks Into the Social Enterprise Sector with First-Ever Loan.” www.socialenterprisebuzz.com/2013/07/30/citi-breaks-into-the-social-enterprise-sector-with-first-ever-loan

[2] The Economist. May 2012. “A Place in Society”. www.economist.com/node/14493098

[3] Chertok, Michael, Jeff Hamaoui, and Eliot Jamison. Stanford Social Innovation. “The Funding Gap”. Spring 2008. www.digitaldividedata.com/media/pdf/DDD-Stanford-Social-Innovation-Review_The-Funding-Gap-Spring-08.pdf

[4] Glassman, James K. Kiplinger. “5 Mutual Funds for Socially Responsible Investors”. May 2012. http://www.kiplinger.com/article/investing/T041-C016-S001-5-mutual-funds-for-socially-responsible-investors.html