A new paradigm for social finance

How a disclosures-based approach can unlock capital at scale for India's best social enterprises

The Covid-19 crisis has, among other things, brought into focus the importance of non-profits and impact-focussed, for-profit, enterprises. These social enterprises have risen to the occasion, doubling down on everything from providing last-mile direct relief to building resilience for the long-term. They are the unsung heroes of our society. Clearly, a path to more sustainable financing for high-quality social enterprises is a critical need in these times.  

It is in this context that the report of the Sebi Working Group (WG) on the Social Stock Exchange (SSE), released on June 1, is quite timely. The report presents a road map for sustainable funding to reach socially impactful organisations in India. In addition to recommending innovative means to expand pools of capital and new instruments through which such capital can flow, it also takes a holistic approach to deepening the funding ecosystem through the creation of sector-level institutions, fiscal benefits, capacity-building funds, and clear standards for minimum disclosure and reporting.

A particularly complex area where the WG has come up with a fresh perspective is on the vexed question of “who is a social enterprise?”. Instead of taking a top-down, eligibility-based approach, the WG opted for a bottom-up, self-declaration model. Quite simply, any enterprise seeking socially-focussed capital can declare itself as a social enterprise, but in doing so, it must commit to additional disclosures that define the social impact it is creating. Such disclosures have been proposed as a pre-requisite to list on the SSE and detailed guidance has been provided on “how” such disclosures can be made.

In taking this approach, ones needs to recognise the challenges in measuring social impact. It would certainly be a futile exercise to lock down a rigid set of metrics that can effectively capture the diversity in the nature, scale and scope of impact that social enterprises create. Unlike financial returns, “social returns” do not have a natural “common currency” for measurement, and force-fitting precise numerical metrics can lead to false precision. For instance, the development of life-skills, or the empowerment of women cannot be accorded a common currency value. Excessive focus on metrics can also gloss over attribution errors and unintended externalities, and disregard the nuances of the quality of work done by many social enterprises.

However, some standardisation in measurement is required if we are to credibly recognise and coherently communicate the impact created by such a wide variety of organisations.
 

This is where the report breaks some new ground. It proposes three specific elements through which an enterprise can signal its purpose, expertise and progress at creating social impact. First, a clear articulation of its strategic intent — the “what”, “how” and “why” aspects of its work. Second, a scorecard for assessing the impact along the broad dimensions of “reach”, “depth” and “inclusion”. Third, disclosures related to its financial transparency and governance. The report presents a framework for disclosing information along these elements and provides indicative metrics and resources for such reporting. Recognising that numbers and storytelling must go hand in hand to present a true picture, it encourages enterprises to present the qualitative narratives of the impact that they help create.

Such an approach presents a paradigm shift from the current emphasis on budget utilisation type of reporting — common among non-profits and their funders today — towards a system in which enterprises can differentiate themselves from each other publicly through a much richer impact narrative.

In short, the framework tries to maintain a delicate balance between standardisation (to make some comparison possible) and diversity (to include the nuances of an organisation’s impact), and between rigour and practicality. This approach was based on feedback from social enterprises that some form of universality was needed, but that too much standardisation could put the SSE out of reach for entities working on niche or complex areas, while too much rigour would ratchet up costs of such measurement excessively. Given that most social enterprises in India are small and have limited resources and expertise to devote to this task, a part of their costs can be picked up by a Rs 100 crore capacity building fund recommended in the report.

The WG suggests gradual enhancements to be made to the disclosure norms over four-seven years, which is in lockstep with the establishment of a strong ecosystem of participants offering support functions, such as social auditors and information repositories. These improvements will result in clearer and more refined statements of intent, a greater shift towards outcomes-oriented measurement, and more granular disclosures of governance mechanisms and financial operations.

Covid-19 has brought renewed interest to direct capital to the highest impact opportunities. This capital is searching for the "unsung heroes" amongst social enterprises. Having a platform to channel such capital to the most worthy causes, through a trustworthy disclosures-based approach, could be a giant leap for India’s social sector.

Pande works with Omidyar Network India; George is with Dvara Research. The authors were part of the drafting team for Sebi’s Working Group Report on the Social Stock Exchange