Fairtrade in a recession: What’s the impact?
This breakfast explored whether the global economic downturn will have a major impact on the Fairtrade movement.
The panellists were (from left to right):
Paul Palmer
Professor Voluntary Sector Management and Finance, Cass Business School
John Madeley
Best-selling author, journalist and broadcaster of international economic and social development issues
George R. Bush
Chair of the City Fairtrade Steering Group (chair of the discussion and debate)
Patricio Angonoa
European Manager, La Riojana Winery
Matthew Hale
Co-operative Affairs Officer, the Cooperative Group
Copy of Paul Palmer's speech to the Business Breakfast
Growth Finance – a new asset class?
Growth finance is currently doing the rounds of the investment world as a ‘new asset class’ but what is it? And is it an appropriate asset class for charities to invest in?
Micro-finance is now well established as a concept and provides start-up capital for individuals or groups to establish a small business. The finance figures involved are very small but can sometimes get into many thousands. But the ‘many’ tails off fairly quickly, and once sums of £100,000 plus are being discussed micro-finance capacity becomes exhausted. So where does the entrepreneur or small organisation go to seek the next layer of funds to expand their business? In the UK this would be normally the preserve of the high street banks or venture capital funds. Such intermediaries however generally do not exist in Africa, and bank lending to small businesses is not the norm. This is where ‘growth finance’ comes in – filling the gap between micro-finance and large scale equity and government-backed finance. These funds have been created to provide a mixture of equity/loan finance for SMEs in Africa. The social investment criteria for such funds are normally on display; for example around job creation and removing dependency on government.
These funds are primarily being advertised and marketed to private investors who, needless to say, are attracted by ‘eye watering’ returns of 20-25% per annum and are not worried about the risk and lack of guaranteed returns. There are some respected names involved in promoting growth finance; for example the Shell Foundation and their partnership with Grofin, an African investment group. Both are investors but are also strong on ensuring that the people and organisations they are investing in are good employers paying fair wages, and that the owners equally have management and other business support to grow their organisations.
So, is growth financing a good investment opportunity for charities? Yes and no. The first question to check out is do such funds qualify as an approved investment class? CC14 which is the Charity Commission’s publication on investment has not been updated for over five years and therefore does not comment on this asset class. As a result, in the absence of a clear regulatory direction, a degree of common sense needs to apply. As some charities know to their cost a relatively large island off a major continent has had a rather large banking problem, and while I would love to visit exotic islands in the Indian Ocean I should have reservations about putting charity funds into organisations registered there!
If you are a charity with an overseas brief, particularly for Africa then it may be appropriate to see growth finance as a ‘programme related investment’ – in essence a hybrid form of grant making – rather than pure investment. However, before taking the plunge some of the ‘socially responsible or ethical’ claims may need further investigation. Private investors attracted to those potential 20-25% returns may not have the same concerns about political and ecological criteria that your charity stakeholders have. In addition, ensuring funds are not for example supporting corrupt practices and damaging environments requires controls – and they cost money which can only come out of those returns.
To conclude, growth finance looks exciting and given the current state of the British economy may be something that could become a feature here. However, it does come with some issues and charities wishing to invest in these funds either as pure investment or through programme related investment will need to do their homework.
Paul Palmer is Professor of Voluntary Sector Management at the Cass Business School and Charities Consultant to UBS Wealth Management