In a recent article for the Guardian,[1] I suggested that if observers were to ‘peer beyond the wreckage of western financial systems’, they could ‘discern the outlines of the future’. I also suggested that the end of the period of ‘global capital markets’ and the ‘financial services revolution’ would usher in a new era of social business and social investment.

Much has been made of the rising level of funds dedicated to social, ethical and environmental businesses and enterprises, but rather less attention given to the businesses themselves (the supply side). Unless the sector pays more attention, I believe this phenomenon will end in tears.

Although the full cost of the financial meltdown is not yet known, initial estimates are likely to prove low and the bill will be picked up by the taxpayer. The debts now being created need to be serviced and eventually repaid. Against this backdrop one can simply forget about expenditure on social programmes. In the face of this challenge, social business and social investment have a big role to play.

Maureen Stapleton writes in this issue of Alliance about the growth of ethically oriented funds. She notes, for example, the doubling in just two years of European SRI Funds to €2.7 trillion. SRI Funds have their place in the ‘ethical arena’, but I believe they also have great limitations – most notably the fact that their portfolios essentially mirror those of mainstream funds. I would point out other even more progressive developments, such as the first closing (at £57 million) in September of WHEB Ventures’ clean tech-oriented second fund. In Canada, Renewal Partners, which has been making social venture capital investments for over a decade, is raising its second fund. In the UK, Bridges will shortly launch the Bridges Charitable Trust, which focuses on ‘equity-like’ capital for social ventures.

Stapleton also mentions UK-based Adili, which has secured funding for its own expansion, while Divine raised funding in the USA for expansion into that market. The Ethical Property Company expects to issue up to £10 million of new share capital in the next 12 months from UK and European investors, to fund future property purchases.

Yet these organizations are exceptions to the rule. While funding has increased substantially, the stock of commercially interesting social and ethical opportunities has failed to increase at the same rate. Statistics on this are impossible to come by, but as a firm that focuses on ‘helping social businesses to succeed’, we believe a great imbalance exists. Investors (in both the private and the public sector) can inject funds at the stroke of a pen, but building great businesses takes time and effort. We are only at the earliest days of this process.

Unfortunately, those firms which do make some progress are often quickly snatched up by buyers. In the UK, the last few years have seen the disappearance of great names such as The Body Shop and Organix Brands (into the clutches of L’Oreal and Hero, respectively), and the purchase of the very large (by social enterprise standards) ECT Group (community transport) by private firm May Gurney (for more UK social businesses see http://www.socialinvestments.com). These and other acquisitions are good for the atmosphere in the sector but will mean fewer high-quality sizeable social businesses to absorb the new capital. If this persists, poor financial returns will follow, thereby discouraging future social venture capital investment.

Two things are needed. First, time – something that few have but which is absolutely essential. Second, capacity building and incubation. There is a general absence of organizations that offer sizeable funds for scaling up. The minor contributions of the likes of Skoll, Ashoka, Acumen and the Schwab Foundation are just too small compared with the capital required.

I have been very impressed with the efforts of the Netherlands-based Noaber Foundation, which has been recycling capital earned in the mainstream (the founders were part of Baan, the successful Dutch software firm) into social businesses. In the government-backed arena, there are few peers for MaRS, a bold and innovative incubator of technology and social firms, based in Toronto, Canada. I am also excited by similar ventures in developing markets. Artemisia, in São Paolo, Brazil, is an impressive social business incubator, which operates in Brazil and in Senegal and France. Recently I have become aware of similar initiatives in other South American and African countries. Perhaps the developing world can show us, in the West, how to do it properly, now that we have faltered?

Let’s see.

1 Society Guardian, 8 October 2008.

Rodney Schwartz is co-Founder of Catalyst Fund Management & Research and Chief Executive of Socialinvestments.com. Email Rod@catfund.com

Full disclosure: the author sits on the board of the Ethical Property Company.