Social Enterprises (SEs) have rapidly increased. 42% of SEs in the UK are less than three years old, while in the EU one out of four new businesses set-up every year are social enterprises. The World Economic Forum has hailed “the talent of social entrepreneurs for identifying market failures that are holding humanity back, and their skill in tailoring and implementing solutions.”
In our third article covering the “S” in ESG, we take a closer look at the characteristics of social enterprises and how they differ from other social business models, we discuss what mainstream businesses can learn from their socially focused competitors and outline how for-profit businesses and social enterprises can successfully collaborate.
SE: A Social Enterprise is a business with a social mission whose profits are solely for the purpose of facilitating this mission.
Social Enterprise UK: The community interest company, founded in 2002 in the UK is the biggest network of social enterprises and its campaigning body in the UK.
BAME: The acronym stands for Black, Asian and Minority Ethnic and is defined as all ethnic groups except White ethnic groups. It does not relate to country origin or affiliation.
The universe of intrinsically social business models
While SEs carry the social aspect in their name, there’s a spectrum of organisations, which are built on equally intrinsically social business models, each of them delivering social impact from a different angle:
- Co-operatives foster ownership in staff and support community causes. Well-known thanks to “Co-op Food”, which is owned by its members and supports local causes chosen by its members, co-operatives range from multi-billion pound businesses to small community enterprises and span all sectors. What distinguishes co-operatives from other businesses is that they’re run not by their members rather than shareholders or institutional investors. There are more than 7,000 independent co-operatives across the UK, owned by 14 million people and contributing £38.2 billion to the British economy.
- Housing associations are not-for-profit businesses with the social purpose to offer affordable accommodation for all. Hence many of them classify themselves as social enterprises. Housing associations date back to the late 19th century, when Victorian philanthropists set up charitable housing trusts, which still exist today such as Peabody, the Guinness Partnership and Octavia. Today, housing associations provide more than two and a half million homes for more than five million people in England
- Charities have to fall into categories that the law says are charitable. These categories include preventing or relieving poverty, or advancing the arts, culture, heritage or science. Charities can’t make profits. All the money they raise has to go towards achieving their aims. While the public generally considers charitiesto fund their work mainly through donations and fundraising, over the years many have started to generate more income from running a business, and as such are following the business model of SEs. There are nearly 170,000 charities in the UK, sharing a total annual income of about £51billion, while also employing over 800,000 people.
- Higher education institutions focus on delivering teaching and research with a SE set-up: Almost all UK universities that receive public funding are charities and raise income from a range of sources, mainly from student fees and grants. Similar to SEs any profits are reinvested back into improving teaching and research.
An introduction into social enterprises
While the traditional view is that charities address social problems and that businesses do not, social enterprises are challenging this perception by choosing a business model with a social mission whose profits are reinvested to achieve their social goals. According to Social Enterprise UK, a business can be seen as an SE if it:
- has (a) clearly defined social objective(s),
- earns more than, or is working towards earning, half of its income through trading,
- reinvests half of its profits into its social cause,
- is transparent about its workings and objectives,
- is independent from the state, and
- is majority owned in the interests of its social mission.
SEs began to increase in popularity in the mid-1990s and have been growing in number since. In the UK, 100,000 SEs –nearly 9% of the UK small business population – constitute £60 billion in Gross Domestic Product and employ two million people. They’re also comparatively successful: The Social Enterprise UK 2019 report found that 52% of SEs increased their turnover in the previous 12 months, compared to 35% of small and medium-sized enterprises (SMEs) in the UK.
As well as delivering positive outcomes for many communities, SEs are also leading by example on a number of social issues: 40% are led by women – compared to 17% of SMEs – and 35% of the SEs in the UK have BAME directors, compared to 5.4% of SMEs .
Prominent examples of SEs in the UK include Divine Chocolate – established in 1998 by a cooperative of cocoa farmers in Ghana that voted to set up a chocolate company – and The Big Issue, which started off as a magazine offering employment opportunities to homeless people and people in poverty and now comprises a social investment business, a charity foundation and a shop curating social enterprise products. Another representative of a thriving SE is the UK based Hey Girls, which was set up in 2018 to fight period poverty through its buy-one-give-one-scheme, benefiting girls and women from low-income families.
What mainstream companies can learn from social enterprises
One such success factor is the holistic perspective on customers and their problems: Businesses typically see customers as separate entities, whereas successful social enterprises perceive customers as a link in an ecosystem. By doing so, social enterprises can solve – or at least attempt to solve – a wider range of problems for their customers, boosting their financial performance, while automatically including social issues because these are part of their customers’ ecosystem – leading to social enterprises generating a higher social impact.
Mainstream companies might equally create multidimensional value, however, by defining their customers more narrowly, they might consider it not relevant to talk about their social value creation. Therefore, they need to look at their customers from a wider angle. Furthermore, the PwC study concluded the majority of businesses still needs to develop their ‘language’ around social impact – including to address social issues they aim to tackle in their corporate value proposition. This goes back to the challenge of assessing and reporting on the S in ESG, which we discussed in our first article about “The social angle”.
Employee motivation is the second key success factor of successful social enterprises. The positive outcomes of social enterprises for society are a large driver for intrinsic motivation, leading to higher productivity and staff loyalty. Mainstream businesses unarguably have introduced numerous initiatives to increase staff satisfaction, with many already seeking positive social experiences for their staff by linking up with charities, offering volunteering days, matching-donation-schemes, fundraising opportunities and other arrangements.
While these measures most often deliver the desired effect of higher staff satisfaction, mainstream businesses can go one step further, and – similar to social enterprises – implement a non-financial company purpose; aligning all business decisions to that purpose. Please read our first article on “The social angle”, which introduces the concept of purpose-led organisations in more detail.
How for-profit firms can collaborate with social enterprises
In the last few years, housing associations have started to engage with SEs in a number of ways, either to run social enterprises as trading arms to deliver services, to buy from social enterprises in their supply chains or to incubate social enterprises being run by tenants. Apart from such partnerships between social enterprises of different natures, corporate partnerships between for-profit firms and the non-profit sector to pursue a common goal are on the rise, too.
Companies looking to strengthen or to reshape their corporate responsibility efforts and SEs aiming to boost their growth in order to increase their social impact, can both benefit in many ways from each other.
Apart from financial support, companies can help SEs to improve their visibility by introducing them to their customers and employees. Through joint volunteer programmes, corporate employees can also directly get involved working for SEs bringing with them their business skills and contacts. Equally, SEs have a lot to offer to companies: Businesses that partner with SEs tend to have better employee retention, satisfaction, and engagement than those without, and volunteering can offer opportunities for professional staff development. Of course, collaborating with SEs can boost a company’s image and generate a positive return on investment, with consumers and other stakeholders recognising that the company’s management is putting money where its mouth is.
One of the most cited partnerships is the joint venture between food company, Danone, and Bangladesh-based microfinance organisation, Grameen Group (which we come back to in the next article). Set-up in 2006, the Grameen Danone Foods Social Business Enterprise (GDF) created a yogurt based on a study they conducted about what nutrients people in Bangladesh were specifically lacking to add those nutrients to the recipe. For its production, GDF built a yogurt factory in Bogra, which created jobs and boosted employment in the Bangladeshian city. Through Grameen’s microfinance program, anyone can sell the yogurts, but it has become a particularly attractive business option for women because of easy access to credit and a stable business program that so far had not existed.
The future will most likely see more high-profile partnerships, especially in the wake of multinationals, such as Unilever, announcing plans to become a B corporation. B corporations are companies certified by the non-profit organisation B Lab to meet specific standards for social and environmental performance.
Read the other articles in the series:
The S in ESG
The “S” in the Pandemic
Social Impact Investing – the search for companies delivering financial return and positive social outcomes
Corporate clients who would like to discuss this topic further should contact:
Dr Arthur Krebbers, Head of Sustainable Finance, Corporates or
Varun Sarda, Head of ESG Advisory