As well as ruffling feathers on paying trustees, Lord Hodgson’s wide-ranging review of the Charities Act also looked at the what can be done to promote more social investment in the UK.

Lending to charities for a mixture of financial and social purposes has emerged as a new way to finance the sector and, as Lord Hodgson notes, the UK has led much of the ‘intellectual “heavy lifting”’, from developing the first Social Impact Bond at Peterborough prison to setting up Big Society Capital, heralded by some as the world’s first social investment wholesale bank.

Yet several legal and regulatory challenges remain and threaten to prevent further growth of the social investment market. The review recommends several ways these could be overcome, including:

  • Allowing charity trustees making investments to consider the social benefits of potential deals, alongside the financial return;
  • Introducing legal changes and reforms that will make it easier for foundations with a permanent endowment to make social investments;
  • Encouraging the government to develop standardised ready-made social investment products.

These recommendations are to be welcomed and have the potential to increase the supply of social investment, particularly from grant-making trusts and foundations.

But, as the review concedes, the regulatory framework is not the only thing holding social investment back; there are other challenges that we will need to address if the market is going to grow. Here are three areas that we at NPC are thinking about and working towards.

1. Developing demand for investment from charities: As well as promoting supply, we also need to consider the flip side: what demand is there for social investment and are charities ready for it? Our experience suggests that often they are not. Social investment won’t be right for every organisation but, even when it is, many charities are coming across this kind of finance for the first time and may not have the right skills or suitable business model. At NPC, we’re trying to increase knowledge of what social investment is and help charities think through when and how it might work for them. Capacity building grants and support will also be needed to get charities ready for investment.

2. Developing the right products: the Hodgson review suggests that creating a standardised investment product will reduce the cost and increase the volume of deals. This is true, but it also matters what that product is. Research we did with Nesta found that the type of investment charities need the most is low risk and is unlikely to yield a very high or very quick financial return. We need to make sure that there is enough capital to fund these run-of-the-mill investments, as well as the higher-risk transformative investments.

3. Understanding social risk and return: it is common for investors to talk about sacrificing their financial return in exchange for a higher social one. But what is this social return? And how can investors tell if the sacrifice is worthwhile? Understanding the social value created by an investment is crucial to this. We’re working with Big Society Capital and Deutsche Bank to think about how shared measurement—creating common measures and indicators across different outcome areas—might be one way to overcome this.

Lord Hodgson wants the UK to become a ‘centre for excellence’ in social investment. If this is to be achieved, the government needs to take the review’s recommendations seriously. But this won’t be the whole story: there is still much work to be done if the social investment is to develop and flourish.

Footer