Covid crisis ‘strengthens the case’ for ethical investment
THERE has been much discussion in newspaper columns, on social media and among friendship groups recently that the tragic coronavirus outbreak could result in some positive outcomes for society.
Many have welcomed the opportunity brought by the social distancing regime to slow down and spend more time with loved ones. Others have said it has created space to reflect on how we lead our lives and treat one another, be it in our personal or professional lives. For Alastair Davis, chief executive of Social Investment Scotland (SIS), the extended period of reflection will also increase investors’ appetite to back companies with a genuine social purpose at heart.
SIS is a not-for-profit, Edinburgh-based social enterprise and charity. With investors such as the Dutch-headquartered Triodos Bank and the main Scottish banks providing core loan funding, its mission is to support social enterprises, community groups and charities with loans and other business advice. It also manages funds on behalf of the Scottish Government.
“Businesses that choose to embed responsibility and impact, through every aspect of their practices, is something that people will value even more importantly going forward,” Mr Davis said. “Some of the investments that the fund has made, and a couple of ones we are looking to make, are focused on much more socially-responsible medical technology businesses.”
In 2018, SIS subsidiary SIS Ventures launched its first investment fund, raising £1.3 million from individuals with sums ranging from a few thousand to hundreds of thousands of pounds.
The funds since been deployed to a range of early-stage ventures and social enterprises. These include Brewgooder, the Edinburgh-based social enterprise which directs profits from beer sales to clean water projects in Malawi. Headed by entrepreneur Alan Mahon, it has responded to the coronavirus pandemic by inviting consumers to gift a four-pack and message of support to NHS workers.
However, as a result of the impasse caused by the coronavirus, SIS has postponed the launch of the second SIS Ventures fund, which will ultimately aim to raise £3.7 million.
“We’ve suspended the second fund-raise [until later in the year],” Mr Davis said. “We are still continuing to deploy money from SIS Ventures from the previous fund-raise, so the fund still does remain active in terms of making investments.
“For us, in terms of a broader strategic point, when this does settle down, we believe the need for investment of the type offered by SIS Ventures will be greater than ever. When you do think about the concept of businesses that behave responsibly and with integrity, and we have seen that highlighted over the last couple of weeks as people have reacted to how organisations have been treating their staff, there’s going to be an ever greater need.”
Before coronavirus came to dominate our every day lives, SIS was already seeing growing interest from investors in companies with a social purpose. At the same time, it has observed an increase in the number of entrepreneurs setting up businesses with socially-driven objectives.
Mr Davis, who joined SIS 11 years ago after previously working with Bank of Scotland in community banking, said: “We do see, and this is widely acknowledged through a range of research studies, that entrepreneurs are now much more focused on setting up businesses that are not just about meeting commercial objectives, but also have some kind of purpose, be that broadly a social or an environmental purpose. That’s something that’s particularly prevalent among younger entrepreneurs, but not exclusively.”
He added: “There also has been a shift from an investors’ perspective, really right through from the individual investor to the institutional investment funds, where there is much more of a focus on making investments that don’t cause harm, and also might be explicitly focused on making a positive impact.
“The demand for investment from these types of organisations is increasing, and we want to be able to support these mission-driven businesses.
“That’s why we have started the second fund-raise.”
Asked whether investee firms are selected by SIS, or the companies approach the organisation for backing, Mr Davis said: “It’s a bit of both. I would say in the main companies are approaching us. They see a strong alignment between their own ambitions around purpose and the fund. There is something attractive for those entrepreneurs in having their purposeful approach they have endorsed with an impact investor like SIS.”
He added: “It’s almost like a badge of honour, in some ways, for these organisations to have SIS Ventures as an investor. And we know anecdotally from the organisations that we have invested in so far that is a positive thing for them for attracting other investors.”
People investing through SIS Ventures can do so through the Enterprise Investment Scheme, which offers a degree of tax relief and, as such, is one of the attractions for investors. While there has been criticism from some quarters that the scheme effectively helps rich people become richer, Mr Davis said that, in the case of SIS Ventures, it helps to develop companies that make a difference to society and the environment. Investors in SIS Ventures are also eligible for the relatively new Social Investment Tax Relief, focused on more “conventional forms of social enterprise”.
In terms of its investment timeline, Mr Davis said SIS Ventures is likely to seek exits for investors after between seven and 10 years. By that stage, he hopes, the purpose would be “integral to the DNA” of the business in question and the “mission can’t be dropped”, with the investor also having achieved a return by that time.
But Mr Davis added: “This focus for us on the more commercial, mission-driven space does represent a shift in the market, but that doesn’t mean we are moving away from our traditional support for charities, social enterprises and social enterprises in Scotland.
“That will remain very much a key part of what we do