The rise of the social enterprise
by Sally Blundell / 21 November, 2017
A new breed of business, the social enterprise, is more intent on benefiting the community and protecting the environment than on maximising profit.
That was in 2012. A mountain of research, a load of experimentation and a rush of Facebook advertising later, revenue from West’s Ethique brand of solid-bar shampoos, cleansers, moisturisers and cleaners – all ingredients, down to the cardboard wrapper, biodegradable – is expected to hit $2 million this year from sales here, in Australia and the US.
A successful crowdfunding campaign in 2015 attracted the highest number of female investors in PledgeMe’s history; a second investment round this year raised $500,000 in less than two hours through crowdfunding and the same amount through wholesale investors.
“We are interested in growth because we want to rid the world of plastic bottles,” she says. A big ask, she agrees, “but it’s a goal we are completely serious about”.
West regards the goal of business as creating something that will make people’s lives better without destroying something along the way, so sustainability is important to the bottom line. Operating from a new 800sq m laboratory and warehouse in Christchurch, Ethique is certified climate-neutral and carries the international B Corporation (or B Lab) certification issued to for-profit companies that meet rigorous standards of social and environmental performance. There is no child labour in the supply chain, no testing on animals and no waste.
The business buys its coconut and cocoa butter ingredients from co-operatives in Samoa and the Dominican Republic respectively.
“People care about what we are trying to do,” West says. “They are interested in a plastic-free lifestyle, in companies that do good, and they demand authenticity: they will not continue to buy a product, and we will not change the world, if we expect them to compromise, because they simply won’t do it.”
Across town, on an inner-city corner section vacant since the 2011 earthquake, a pedal-powered trailer of green waste bins collected from local cafes and restaurants is being unloaded. Here, as part of an urban garden project called Cultivate, the waste will be turned into compost, which will be used to grow vegetables, which will in turn be sold back to restaurants, cafes and the community.
Along the way, says the project’s co-founder Bailey Peryman, young people are learning how to grow food, the neighbourhood has access to fresh produce and restaurants have solved their green-waste problems.
Peryman says Cultivate is a sign of a thriving community. “Food is a great way to grow a sense of being in nature.”
West and Peryman are not lone voices. All over the world, small enterprises are tackling social, cultural or environmental issues: diverting waste from landfills, giving jobs to the long-term unemployed, cleaning up waterways and feeding the hungry. Peter Holbrook, the chief executive of Social Enterprise UK, in Christchurch to address September’s Social Enterprise World Forum (SEWF), says there is growing realisation that our economic models are not sustainable.
Social enterprises, Holbrook says, are part of the solution, changing the way charities raise funds and businesses do business. They are more dynamic and more innovative than conventional businesses and fairer to women and ethnic minorities: “This is not just something that deals with market failure or public-service delivery; it is something that is thriving and disrupting markets across the world.”
Ronald Cohen, who chairs the Social Impact Investment Taskforce of the G8 – the industrialised economies of the world’s major democracies – goes further: social enterprise, he has said, is bringing the world to “the brink of a revolution in how we solve society’s toughest problems”.
That may be stretching the point a little too far, says Alex Hannant, founding chief executive of the Ākina Foundation, a charity whose mission is to expand social enterprise in this country.
“But I think there have been some very artificial silos: a charitable sector rooted in the Victorian era over here; a post-war welfare safety net there; a massive scale-up in business as a result of technology and globalisation over there.”
Now, he says, silos are being opened up: charities and not-for-profits are stepping up their trading activities and businesses are rearranging their mission statements to include social or environmental goals. Meanwhile, Māori development is modelling a new way of doing business. “All are creating this middle place, this third way, called social enterprise, where profit-making entities put social, cultural or environmental goals at the forefront of their business plan.”
The 1600 delegates from 45 countries who attended the SEWF, hosted by the Ākina Foundation, needed no convincing. And a new generation of entrepreneurs is grabbing at the opportunities: in the UK, an estimated 80,000 social enterprises, from small start-ups to organisations with hundreds of employees, are turning over about £25 billion ($48 billion) a year. In Scotlan
d, a country similar in population to New Zealand, 5000 social enterprises employ more than 112,000 people and contribute £1.68 billion to the economy.
These enterprises are not just surviving but thriving, even outperforming mainstream businesses financially. Surveys suggest that one in three British consumers will pay more for products that have positive social or environmental impacts and 60% of millennials want to work for an organisation with a social purpose.
A report to the Department of Internal Affairs last year, “Social Enterprise and Social Finance: A Path to Growth”, says the Scottish figures suggest that by 2025, “with the right supports” New Zealand could have 4000 social enterprises – twice as many as we have now, turning over $2 billion a year.
In the US, the trend is snowballing, with investors joining in. According to Forbes magazine, assets under management in sustainable investment funds have increased by 135% since 2012 to US$8.72 trillion ($12.7 trillion).
London-based Rob Wilson championed his “delicious and pint-sized” response to the 900,000 tonnes of fresh bread – more than 40% of the total baked – that goes into landfills each year in the UK. His Toast Ale, an award-winning beer using bread that would otherwise be dumped, is now stocked by British supermarket chain Tesco and was recently launched in the US and South Africa. He has published his recipe so bakers and brewers around the world can partner up to replace expensive grain with surplus bread.
“We are not preachy,” he says. “We are not pointing the finger. This is a frigging beer at the end of the day. But food waste is a really fundamental issue. We don’t want to be around forever, we don’t want to see food waste in the first place, but there is a lot of bread going to waste and we see a solution to that in the beer industry.”
Elsewhere on the bill at SEWF, Andrea Chen described the Propeller Incubator, the small enterprise she co-founded in New Orleans in 2006 to help local entrepreneurs establish their businesses amid the chaos left by Hurricane Katrina. Now it supports more than 50 start-ups and not-for-profits dealing with poverty and racial inequality.
The Skill Mill in north England gives young people caught up in the justice system work in environmental projects, where they can obtain land management qualifications. Javara in Indonesia protects food biodiversity and indigenous knowledge by finding new markets for artisan products made by local farmers.
In New Zealand, achieving social value through the marketplace is not new. Trade Aid has been using fair terms of trade to support farmer or artisan groups to break out of poverty since 1973.
For 60 years, Kilmarnock in Christchurch has worked to provide meaningful employment for people with disabilities. It has changed from a charity to a business model, competing on its own merits for commercial tenders.
“We had to turn the message from ‘please help us’ to ‘this is what we are really good at’,” says chief executive Michelle Sharp. “Now, our customers need us as much as we need them – it is a mutually beneficial relationship.”
Although 70 of the 100 staff have disabilities, there is no “them and us”, says Sharp, a former telco high-flyer who came to Kilmarnock in 2010 after finding a “huge gap” in her life on top of the corporate ladder. “We are all just one team trying to achieve the same goals and we all bring strengths to the table.”
In recently expanded premises, Kilmarnock offers food-repacking services, recycling, decanting of bulk crushed glass, wooden furniture and toys and administration services. It has big contracts with Fonterra, the Gough Group and Air New Zealand among others. Staff have access to health and safety advice, fitness and yoga classes and a new training academy to break the glass ceiling for school leavers with disabilities.
As in the UK, however, many social enterprises in this country are relatively young. In 2010, artist and occupational therapist Juliet Arnott set up ReKindle, a venture in Auckland aimed at reducing wood waste. Following the Canterbury quakes, she moved to Christchurch and set up a workshop where timber from demolished houses was fashioned into thousands of dollars worth of furniture, jewellery and art objects. It reduced the mountain of building materials going to waste and provided jobs and training for 20 people.
ReKindle now runs workshops in traditional craft-making skills such as whittling, weaving and carving, using wood or vegetable fibres otherwise destined for landfills. It’s turning nothing into something.
Hannant says that initiatives such as these are neither fads nor commercial operations tacking a plausible social or environmental activity onto a business-as-usual programme. “We are talking about organisations that exist primarily to meet a social need but are delivering it through a business model. It is great to see more mainstream businesses finding more sophisticated ways to create social value, but when we are talking about social enterprise, we are really asking, ‘Why do you exist in the first place? It is because you exist to deliver a social or environmental benefit.’
“It is about the power relationships and democracy inside an organisation. It is about community resilience, connecting people within the community and re-orienting the economy around them.”
Cultivating a sense of community is the driving force behind Crave, a cafe in the inner Auckland suburb of Morningside. It’s a hub for food, coffee, conversation, cooking classes, quiz nights, education nights and a twice-yearly free street feast. That idea was launched in 2010, when co-founder Blue Bradley unloaded a dead pig from his car boot. That evening, about 80 locals got to know each other over a free barbecue and a memorable community experience.
“It’s a neighbourhood thing,” Bradley says. “We’ll facilitate it – we’ll create a venue, do the PA or the pizza oven, but everybody helps out. People say, ‘You guys are creating legendary experiences our kids will never forget’, but I think all communities should be creating legendary experiences their kids will never forget.”
Bradley’s point is that everybody wants to live in a community of their dreams but they don’t just happen by themselves. Among people’s problems are loneliness and social poverty. “When we first started the cafe, there was a lot of high-density living but no social spaces where people could connect. It was a bit soulless, a bit industrial. But hospitality is something you do with your life, not just the hospitality industry, but living lives that are hospitable – the cafe is an extension of that.”
Now in its third incarnation, in bigger premises and with a staff of 45, Crave is still channelling its efforts – and profits – into strengthening the local community.
“It still has to run at a profit,” says Bradley, “but if profit is not your primary reason for being in business, everything is up for grabs.”
To make progress, social enterprises need to break into the mainstream, says Hannant. This in turn requires more Government support and more consumers using their buying power to reward initiatives that have a social value.
“It’s push and pull,” Hannant says. “Consumer demand can be triggered by options being there in the first place, providing more purchasing or service opportunities for people to choose from in their everyday decisions. But at the same time you are trying to build public awareness to create demand. If we want an ethical pension fund, for example, maybe someone will create that opportunity.”
In the US, sustainably invested assets now account for more than one dollar in five, and millennials are twice as likely to invest in shares or funds that target specific environmental or social outcomes.
In New Zealand, social enterprise start-ups find receptive audiences on crowdfunding platforms, but high-end, high-impact investment is still in its infancy, says Bill Murphy, executive director of Tauranga-based Enterprise Angels investment network. Some investors say it’s too risky, but “others are starting to wake up to the fact that we can’t keep going the way we are and they will ameliorate the commercial way of looking at it. They’re saying I want my money to make a difference – a capital D difference.”
Local authorities, too, are beginning to look at how they can make a “capital D difference” through their procurement strategies. The 2002 Local Government Act requires regional authorities to adopt a sustainable development approach to procurement practices, taking into account the social, economic and cultural interests of their communities and the need to enhance the quality of the environment.
Tania Pouwhare is the social “intrapreneur” for Auckland Council’s The Southern Initiative (TSI), which aims to increase social and community innovation in South Auckland. She says that although the council’s size makes it difficult to connect with smaller businesses and providers, some arms of the “council family” are using tenders to help social enterprises meet procurement and social-outcome goals.
“It is not just the type of nails you are going to use in the decking or the pitch of the roof,” she says. “Those things are there, but we are now buying quality employment outcomes for people far away from the labour market, reductions in carbon emissions and diversion of waste. So it’s the impact we are buying – on local communities, environmental sustainability and on wider social outcomes.”
Each purchase, she says, carries different weightings according to different criteria: the emphasis may be on gender equality, professional development, leadership, wages or, of course, cost, “but we are not about feeding the low-wage, low-productivity problem. Our job is to disrupt it.”
To help smaller enterprises compete in the tendering process, large projects can be “unbundled” into small packages. When a comprehensive creek restoration project was planned for Mt Roskill, for example, the propagating and planting portion was awarded to the local Te Whangai Trust. The trust has since set up a native nursery at Wesley Intermediate School, where vandalism has fallen, schoolchildren are learning about native plants and biodiversity and unemployed locals get training and qualifications in horticulture, says Pouwhare.
Earlier this year, TSI joined Auckland Transport, winner of the 2017 New Zealand Procurement Excellence Awards for its commitment to social and environmental outcomes in its City Rail Link project, to develop Fale Kofi, a coffee kiosk at the new Ōtāhuhu bus-train station.
The pop-up cafe, run by local Pacific youth agency Affirming Works, offers Māori and Pasifika food with a focus on high standards of nutrition and affordability. It is staffed by young students, who fit work around their class timetables, and promotes Māori and Pasifika identity though food options, bilingual signage and a fit-out designed by Roots Creative Entrepreneurs made from recycled and upcycled materials.
As a pilot social enterprise model, says Pouwhare, it’s a win for all parties: the city gets a vibrant transport station, local businesses are developed and supported, “and visitors know they are in the largest Polynesian city in the world”.
No easy task
“How does the Government get more value, how do we as taxpayers get more value out of things we would have bought anyway?” says Hannant.
For central Government, that win, facilitated by close engagement with grass roots organisations and community groups, is not so easy to attain. Governments have huge buying power: from big contracts for social services to paper clips and toilet paper, OECD Governments spend about 15% of GDP on procurements. But finding ways to use that spending to improve social and environmental outcomes has been a slower process.
“Social enterprise is part of our thinking,” says Margaret Pearson, chief adviser of procurement for the Ministry of Business, Innovation and Employment. “It is not saying you have to favour a social enterprise over another type of business. It is about fairness to all suppliers, which links back to our international obligations, but the principles are flexible enough to allow agencies to make those balanced decisions and take those other factors into consideration.”
Crown agencies have a responsibility to get the best deal, “but that doesn’t always mean the lowest price – economic, social and environmental impacts should all be considered as part of that procurement process. Quality of supply, ability to supply, sustainability – those factors are all taken into consideration. It may not be worded ‘social enterprise’, but the rules and principles are flexible enough to draw those three components into consideration.”
The postie cometh
NZ Post, which is now in its 177th year, has been using that flexibility to support local communities for more than a decade. It encourages its staff to do volunteer work; it is reducing its carbon footprint through the use of recycling and electric vehicles. Now, in partnership with Ākina, it uses its procurement processes to help social enterprises. For the SEWF it contributed delegate bags made from recycled billboards by Wellington social enterprise Spinning Top. It also negotiates subcontracting possibilities with larger suppliers, and is working with Ākina to set up regional social enterprise hubs for training and support.
“It is not a question of spending more,” says NZ Post head of sustainability Dawn Baggaley. “We have to manage our costs because we have to deliver a return to the Government and, as with any other purchasing decision, we look at all the criteria – cost, service delivery and the additional social or environmental value that it adds.
“For us, it is a no-brainer: we are going to buy these goods and services anyway, so if we can buy them from a social enterprise that can deliver the same product or service and deliver a positive impact in society and the environment, then that is good for us, for our customers and the community we operate in. Why wouldn’t we do it?”
But there are barriers. Many small enterprises do not have the business acumen to compete with large-scale operations; few would have the tender-writing teams to seek out lucrative local or national government procurements; some struggle to tell their story to win the interest of consumers and investors.
Another challenge is the absence of a legal structure for this new breed of values-based commercial entities. As it is, a social enterprise must operate either as a charity or a limited liability company. Neither model, says Christchurch lawyer Steven Moe, works well.
“A charity will struggle to find investors or business support because there cannot be any private benefit. A company can be profit-making, but then it is not eligible for public-sector funding or philanthropic grants.”
Moe is recommending a mix of the two: a separate legal structure by which social enterprises must state their purpose and report on their social benefit activities. Such an entity would be required to put a cap on the level of dividends paid out and would be able to claim tax exemption for the parts of the business that are purely charitable.
As he points out in a new legal handbook on social enterprise, this is being done overseas: Scotland recognises social enterprise through a legal “community interest company” category; Canada and 32 US states give legal status to social-benefit corporations and Australia is looking to introduce something along those lines.
“So we need to take the best of what has been done overseas and apply it here. A social enterprise company structure would automatically mean people feel comfortable that you are trying to do something good and acting with purpose. As well as attracting investors, it would raise the profile of the sector in a way that is not possible if we just make do with existing structures.”
Hannant says a distinct legal structure for social enterprise would also make it easier for the Government to develop policies and financial support for those organisations, provide quality assurance to customers and investors and reduce the risk green-washing – people calling themselves social enterprises because “they feel it is a popular thing”.
The Government is looking at new ways to support social enterprise. The report to Internal Affairs proposed a cross-agency Social Enterprise Unit to address policy barriers, an intermediary body to spearhead social enterprise growth through mentoring, technical assistance and online resources, and a development grant fund for social enterprises in their early stages.
Already momentum is growing. In 2014, the Rata Foundation, formerly the Canterbury Community Trust, allocated $2.5 million to a new Social Enterprise Fund. Last year, the then Community and Voluntary Sector Minister Jo Goodhew announced a new cross-agency working group to gather more data on social enterprises and explore ethical investment. In July this year, the Government announced $5.5 million in funding to boost social enterprise and do research into the size, scale and value of the sector over the next 3-4 years.
This year, too, Ākina announced its Impact Enterprise Fund for large-scale investors, and the country’s first social-procurement model prioritising Maori and Pasifika enterprises in local government and corporate supply chains was launched. NZ Post, meanwhile, has committed to buying goods and services from at least three social enterprises over the next 12 months.
Community and Voluntary Sector Minister Peeni Henare says the Government will be looking at further ways to facilitate social enterprise. “It is something that has really come on to the radar over the past decade and we are keen to see it grow more.” But before looking at further funding commitments, he says, it is important to see where any barriers to growth might be – whether in legislation, policy “or the mechanisms that allow businesses and the like to donate or contribute to social enterprise”.
Watch this space, says Hannant. Following overseas trends, social enterprise, he says, will raise standards across the economy. Mainstream business will be expected to create more value by including social enterprises in their supply chains, and everyday investors will be demanding more from their pension funds and savings accounts.
“It is important we see social enterprise as a tool, but it has to be led by something which has more intention around what is the community and the country we want to create. Then, within that vision, what does business look like? Rather than seeing it as a niche thing, it should resemble what wider society wants.”
In her Christchurch laboratory, Brianne West has no intention of developing Ethique as a niche brand.
“When you enter a new market, you have your early adopters – but then hopefully you branch out because your product is so good they tell their friends. I want this to be business as normal – business should be responsible. It concerns me when people ask why we operate in this way. Because you should do – it really is that simple.”
This article was first published in the November 11, 2017 issue of the New Zealand Listener.