Social investing to be key ESG theme in post-Covid world

21 Jul 2020

“In recession after recession, there has always been a surge of interest in social investing.”

With the UK heading for what is believed to be an unprecedented downturn, Big Issue Invest chief executive Danyal Sattar tells Mark Dunne about how investing to make a social impact could help.

How has the lockdown been for you?

Just like everyone else, we have been getting to grips with what this new normal looks like.

We are a non-profit social enterprise that has about 20 members of staff. We changed our working practices in response to the virus before the lockdown and are struggling to serve our clients from home just like everyone else.

We invest in about 200 organisations, with around 170 on our lending side and the rest in our fund management portfolios. Like any other business in the UK, we have had to adapt.

We invest in some extraordinary organisations. Connection Crew is a good example. They fit everything for events, from setting up tables and chairs to building entire sound stages. The reason why they are a social enterprise is that they initially employed homeless people. To this day, about a fifth of their workforce at any one time is homeless.

You can imagine what it’s like when you rely on events and a pandemic happens. They went from looking at a healthy order book for March and April to literally zero.

How do we support organisations like that through this? Simple: we had to do what every financial organisation had to do, which is to freeze loans, increase capital payments and reinvest.

Connection Crew is one of those businesses. We offered a loan to help them hibernate through this time because they know that as soon as this comes to an end, whenever that is, organisations will need to set up events.

They had one final bit of business before they hibernated, which was helping to fit out the Nightingale Hospital at the ExCel Centre in London. That was a little bit of good news for them.

Have you ever experienced such economic disruption before?

Nothing quite like this. I was a child refugee and lived through several wars, floods, famines and military coups as a young person. I have lived in countries where infectious diseases are rife, but this is off the scale of anything I have experienced before.

It is useful to think about the number of recessions that we have been through in our working lives. The mass unemployment in the 1980s, the recession in the 1990s, the recession in the early 2000s and the global financial crisis.

There is something where people who have been through economic downturns before can recognise familiar patterns, but even older and wiser members on investment committees would say that in 40 years of investment experience they have never been through anything like this. This is off the scale.

Despite this being “off the scale”, did Big Issue Invest have a plan for managing a sharp downturn?

I have to hold my hands up and say that a global pandemic was not on my risk register. There are organisations that did. Wimbledon, for instance, had insurance for a global pandemic as did charities and some of the social enterprises that we have backed. So there are people who thought seriously about this known global risk and put it into their plans.

In some ways, without taking any political stance on Brexit, all the additional planning we had to do around it has helped us. We were already thinking about mass civil disobedience and the inability to access certain premises for days, so we were fairly-well prepared having reviewed all our disaster programmes as a result of Brexit. All that planning helped us.

The fascinating thing for us is that we have been able to sustain ourselves in a way that has been extraordinary. There are two sides to us. We are an independent organisation with about £23m in our loan funds and £43m of funds under management across our three partnership funds.

We are a micro organisation in the financial services industry, but what we have done is say to the people we invest in: “Your request is sensible, let’s stop taking money out of the sector.” We can then go to our investors and say: “To do that deal you need to do the same thing for us. Let’s all pull together.”

As an ecosystem, if we move together and do that kind of pause then it works well for all of us. Our parent organisation, The Big Issue, also went through a profound transformation.

The magazine arrived through my door today. It is normally sold by around 2,000 vendors up and down the country every day. They are self-employed. They buy the magazine for £1.50 and sell it for £3, so their margin is £1.50.

As you can imagine that when the homeless were taken off the streets at the start of this pandemic, the vendor base disappeared. The people who buy the magazine are also off the streets.

There was an incredible pivot in the magazine. In 10 days they launched an app version. The magazine came through my door because I took out a subscription. We always had a small-scale subscription operation for the magazine and that has been pushed out and promoted.

The magazine has had tremendous support. The Times ran an appeal for The Big Issue, which has been incredible.

That kind of donation has supported our founders. It has also meant that the organisation pivoted its business model so that by the time the vendors come back to the streets, we still have a product for them to sell. We have done many things in the magazine business that had to be done in terms of transitioning to a cashless society by making sure that every vendor can take cashless transactions in a way that they could not before.

On The Big Issue Invest side, which I lead, and on the magazine side, this demonstrates that charities and social enterprises are having to carry on serving people when they need it the most.

Are people still asking you to fund their businesses at the moment, or is it mainly existing clients needing help?

It is a mix. I tend to think that everything I believed before the pandemic is no longer true. That has probably been the pattern of this pandemic.

Before the lockdown we were looking at our portfolio and asking who is going to be impacted. I thought the care businesses, such as Cornerstone in Scotland or the employee-led Be Caring, would be where we see some of the biggest financial impacts.

We were anticipating that staff would get sick, they would have to bring in agency staff and their costs would go up. That has not been the case.

It’s pretty simple stuff. We raise money and reinvest it. People like the transparency and connection that they get with social investment.

The government interventions to support the care sector have been reflected in what we see in our portfolio. Local authorities have been able to pay people differently than normal. They are paying their staff more in advance rather than in arrears.

So all kind of things have washed through that I had not anticipated, which has been positive. But charities or social enterprises that offer a public-facing service are still being hammered.

People offering educational services and anyone else out there interacting with other people have had their business model hammered. In terms of financial support, we have had people approaching us to help transform their operations to the new normal. It’s investing to transform for a new situation.

We have not seen the start of this yet, which may be a bit of a depressing thought, but there are reasons why we ask if companies have three months of reserves. If they have, it is probably a good thing.

The months have been ticking by and we are just beginning to see the financial impact on charities and social enterprises.

Reserves will be exhausted, so I expect we will see what we usually see in a recession that just when things are starting to look brighter companies go bust. They have exhausted their resources just to stay alive and do not have the liquidity to get back trading again.

In our sector, the furlough scheme has been widely used. It has been fantastic for charities and social enterprises just as it has for the commercial sector. With the one caveat, that at the time when our services are needed more than ever with our charities providing mental health support to people, if you have to furlough your staff because donations have fallen then you are less able to provide the support people need.

If you are furloughed, you are not able to work, which for a charity or social enterprise is a real issue, but it has led to people staying in employment and that is a very good thing.

We are also seeing a strong take up by charities and social enterprises of the bounce back business loans. The speed and simplicity of that government-backed scheme delivered by mainstream banks has been helpful from what we can see at this early stage. We participate in the Coronavirus Business Interruption Loans Scheme. We do that through a consortium with Social Investment Business, Big Society Capital, Social and Sustainable Capital and Charity Bank.

This group is providing Corona business interruption loans to charities and social enterprises right now, so that has been something positive we have been able to do.

Charities and social enterprises are needed now more than they have ever been

With unemployment rising, will there be a greater demand for the services provided by organisations such as Big Issue Invest in a post-Covid world?

There is good news and bad news. The bad news is that we are anticipating the economy will be in a difficult state. I don’t envy the decisions that the government are having to make. This is an extraordinary time. We all thought the global financial crisis was extraordinary. This is another step further out.

We are anticipating a deep slowdown and recession after this. In times such as these, there tends to be a real interest in putting money into something with a social purpose.

Back in the 1990s there was a banking crisis in Scandinavia that led to an upsurge of interest in co-operative JAK, which stands for Jord Abete Kapital (Land Labour Capital). They were making mortgages affordable by lending money at zero interest.

The interest in those schemes really grew. In recession after recession, there has always been a surge of interest in social investing. Be it in Ecology Building Society or Triodos Bank or more riskbased lenders such as ourselves.

Two things happen. People want to give something back; they want to do something positive with their money.

The second point is that they want to see where their money is going. The financial services industry that we operate in can be disintermediated and opaque as to where the investors’ money is going.

There is a real simplicity in what we do. We publish a list of the people we invest in. You can clearly see what we do and how we do it. It’s pretty simple stuff. We raise money and reinvest it. People like the transparency and connection that they get with social investment.

So post-recession there tends to be an interest in this as there is a need for it. We are going to have to do things we have not done on that scale before around training people to get them back into employment.

After the global financial crisis, we avoided the worst of the recession through the gig economy and not having an increase in real wages. Back then we had a focus on people not being in education, employment or training.

But we are going to have a wave of re-skilling work to do around employment in a way that has not happened for 15 or 20 years. It will be different from what we have done in the past, but the demand will be there for our services.

It would be great if it wasn’t. We could all put our feet up and go off to some desert island, but charities and social enterprises are needed now more than they have ever been.

Watch the full interview here

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