The recent clarification from the Charity Commission that charities can invest for a social return is good news for the social investment market. The previous guidance was confusing for trustees, unsure of whether they could use charitable funds to make social  investments.

But there will still be many trusts, foundations and grant-makers reluctant to dip their toes into this market. The mantra coming from many foundation boards is that they have a duty of care to maximise financial returns so that they have more to give in grants. So they’d prefer to stick with commercial investments.

This would be a compelling argument if there were decent and reliable returns to be gained from commercial markets. Frankly though its hard to find any commercial asset class offering a respectable reward in return for the risks. In olden times equities could be relied upon for a slow but inexorable rise in values over the long term, with periodic price corrections. No longer. The Footsie 100  has been trading (with extreme volatility) in the same range for the last decade and a half. Although it is technically possible to earn modest cash dividends from shares, if you need the capital back, deciding when to cash in the shares can be a roller coaster ride. Meanwhile, returns on cash investments rarely keep pace with inflation, let alone offer a return. A nice government bond, index-linked, was withdrawn after being swamped by investor demand. The price of corporate bonds yo-yo up and down so again, exiting before maturity is hazardous. And there is something distasteful about institutions aiming to achieve social good by making a fast buck out of commodities or property.

Making good money off foundation portfolios for the benefit of charity recipients is therefore extremely difficult in such conditions. And if anyone has cracked it, please can they manage my pension pot.

So how can a foundation make its portfolio work hard for social benefit? A few foundations, like Esmee Fairbairn Foundation, have set aside funds to experiment with social investment. They are accepting lower financial returns in exchange for social impact – although such lower financial returns hardly compare with the 50% ‘hair cut’ demanded of Greece’s creditors, which include banks. Figures released by social investors such as Social Investment Business talk of quite modest capital write-offs—5% cumulatively over several years. Ie SIB expects to get 95% of the money back and can then recycle it. Not bad, if you achieve good social impact in return for your small loss.

But we’ve still not got to the bottom measuring the social impact of social investment. The sector is getting on the case to think about how to assess the social impact of such investments, and I’m optimistic that when we do start assessing the impact, we’ll find its mainly positive.

Another market challenge is the availability of ‘investment ready’ opportunities for social investors. With Big Society Capital starting to disburse funds to intermediaries, there is a risk of too much funding chasing too few deals. Or wanting to find deals on terms which don’t quite match demand. This is one of the reasons why NPC will be publishing a guide to social investment for charities in November, which we hope will help charities to think about whether taking on loans or other types of social investment is something which could benefit their cause. For instance, could social investment accelerate the provision of urgently needed new facilities or services? Or help to make money for charities?

And in the meantime, I think more foundations should consider dipping their toes in this interesting area. Many have close relationships with grantees already, which puts them in a good position to invest appropriately in these grantees. They know the management –  helpful in developing a pipeline and a key step in assessing risk. But not all foundations are confident in this area, but could borrow the expertise of others as they experiment? Food for thought perhaps.