In the financial world, risk is about projecting potential loss. Like betting odds, it is a way for investors to understand just what they are getting before they buy. Applied to social investments, risk rating can also assess potential impact. The SA Social Investment Exchange (SASIX) has been using risk rating to evaluate projects since its inception in 2006 and the lessons learned here are being applied to a pioneering initiative bringing the rigour of the financial world to social development.

Risk is about projecting potential loss. In its broadest description, risk measures the size of the potential loss, as well as the probability of such loss.

Risk measurement underpins the world of investment. Values are assigned to the relative risk of projects or organisations, deciding their investment potential. The rating provides the investor with externally verifiable information which he or she can use to make an informed decision about where to invest. Country risk rating, for example, surveys set indicators of political and economic stability. The comparability of ratings across countries creates a common vocabulary to assess investment risk.

Identifying hurdles

Risk rating organisations with a social mission goes beyond assessing the potential for success. Critically, risk measurement also tries to determine the capacity of the organisation to overcome potential hurdles.

SASIX carries out a detailed assessment of project risks on all potential investments as an essential part of its screening process. The risk measurement tools have been designed to consider critical factors relating to project and organisational capacity:

• Concept - the strengths and risks of the organisation’s approach.
• Design - the strengths and risks of the methods used. Are they effective and proven? Or are they innovative and untried?
• Capability - the strengths and risks of the organisation’s leadership. Are the leaders experienced and skilled? What depth exists within the organisation to absorb a change in leadership?
• Control - transparency, governance and finances.
• Sustainability - will the organisation have a lasting impact? Is it able to continue beyond the investment timeframe?
• External - what are the risk factors outside of the organisation\\'s control?

A dual approach

The extension of the SASIX model with Cadiz Asset Management in 2008, to assess social investments offering a financial return means that these investments are also evaluated against financial risk factors, including a detailed analysis of financials over the past five years. GreaterCapital’s Socially Responsible Investment (SRI) analyst Keith Mauppa, sums up the importance of this dual approach:

“Both the organisational and financial assessment are equally important for SRI risk assessment. At GreaterCapital, no organisation would be approved for investment if it did not meet both these criteria, even if one were significantly strong and the other weak.”

Track record

SASIX provides both a graphic and narrative demonstration of risk on projects which helps to contextualise the organisation’s track record and alignment to best practice in its sector. And it is SASIX’s own track record that will one day see the birth of an independent platform – a social stock exchange – providing a verifiable and standardised ranking of project risk against clear and comprehensive indicators.

Elena Mancebo Masa, who heads up SASIX programming at GreaterCapital, explains that an independent and open social stock exchange would provide a transparent environment for social investment: “Such a social stock exchange would accredit listing agencies to carry out the due diligence process on organisations. These agencies would rate risk on applicants according to the agreed standards and criteria, feeding the results back onto the independent exchange for investors to view.”

Flagging the risk

Risk assessments on social investments provide for an in-depth analysis of organisational and project vulnerability, generating investor confidence. Accompanied by measurable outcomes and impact assessment, this is one of the enduring processes which will continue to shape social investment potential.