Balancing social investment risk and reward

  • 14 September 2015 | Adam Boros| Opinion

There is great power and promise in funding education, health and social development programmes. Social investors, both large and small, have made invaluable contributions all over the world towards the alleviation of poverty, the improvement of education and the strengthening of health outcomes. These accomplishments have been made possible by the targeted spending of funds, as well as the innate advantages of social investment, such as the ability to be flexible, innovate and take risks.

Despite these advantages, social investment is an inherently risky business. As we set out to invest our money as effectively as possible, we are faced with a litany of risks and challenges1:

  • We can innovate to maximise impact through high-risk/high-reward initiatives, but failure of programmes can lead to accusations of wasting funding.
  • We rarely have sight of a “finished product” or programme before making a funding decision, and generally must assess hundreds (or thousands) of potential grantees using imperfect or incomplete information. Furthermore, grantees typically present only their success stories and not the lessons learned from what hasn’t worked. Our sector is notoriously poor at acknowledging and sharing mistakes.
  • Working with deeply human challenges is difficult and fluid, requiring the ability to adapt and be creative.
  • We have almost unlimited flexibility in designing the composition, size and length of grants, but this can translate into less-than-optimal investments that are too short term to bring about lasting impact, too small to cover all the necessary costs of the intervention and/or too restrictive to let partners implement effectively.
  • Measurement of “success” is incredibly complex and without voters, shareholders or customers (let alone revenue and profit figures) we don’t have clear market indicators to guide our decisions. Of course, lack of shareholder or customer pressure is also an advantage as it allows us to operate with limited fear of going out of business. In fact, “of all the characteristics that distinguish philanthropists, the single most consequential may be the fact that they are essentially accountable to no one but themselves”2.  If left unchecked, this lack of accountability may lead to arrogance, throwing money around with little care for impact, complacency or, in the worst case, abuse of funds. In social investment, high levels of discipline are required – “unless you demand outstanding performance from yourself, no one will demand it of you”3.

Such macro risks are accompanied by numerous micro risks that must be identified and weighed with each individual grant made. At this level, risk mitigation focuses on how to ensure that every grant approved goes towards the best organisation for the job, with the best chance of success. These risks, which are analysed by Tshikululu for every application that comes through our doors, relate to implementation, track record, strategy, key person dependency, human resources and capacity, management and governance, finances and reputation.

Of course, there is no perfect grant. As in any other business, there will always be some risk. With each investment, we must analyse the various types of risk and decide on our level of comfort. Through this analysis, we mitigate risk, while avoiding being so risk averse that we end up doing nothing at all.

Being a social investor is a great privilege, and balancing the responsible stewardship of public benefit funding with the ability to push the boundaries of possibility is a key part of the journey.

1 Parts of this article have been adapted from: Leat, D (2005) “A discussion paper on risk and good grantmaking”, Big Lottery Fund Research (Issue 17).
Tierney, TJ and Fleishman, JL (2011) Give Smart: Philanthropy that Gets Results. New York: Public Affairs, p. 115.
3 Ibid., p. 84.

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