I was working as a special adviser at the Department of Trade and Industry at the beginning of the 2000s when Sir Ronald Cohen began pushing for what was eventually to become, in 2011, Big Society Capital (BSC), the world’s first social investment institution.
BSC is now fully up and running, and importantly has support across pretty much all political parties—a rare thing indeed. This is all to the good, an important and positive development in supporting the social sector in Britain. But through all this, my message is clear: social investment is no panacea, and it’s not for everyone. Sometimes the rhetoric used to describe progress on social investment gets the charity sector cross. Many are seeing the demand for their services going up while their funding is being cut, and they do not feel that new money via BSC is the answer for them—and many are right.
At NPC we have come to realise that a lot of people still don’t fully understand social investment. It covers a number of different aspects which are easily confused.
Some is about charitable foundations providing loan funding for projects, often secured loans. Some is where charities have raised bonds, like Scope and Mencap, often property related.
Others are about funding social impact bonds (SIBs), which involve investment related to payment by result contracts, usually to provide public services. These SIBs are much talked about but are still at a very early stage, with only 13 social impact bonds active to date. I recently spoke at a meeting of charity finance directors in Wales and the South West where few had even heard of them!
In addition to SIBs, we have socially responsible investment funds, not dissimilar to ethical funds, with ISAs in social investment about to be launched at the retail market. And finally, we have funding for social enterprises, where the loans are used to generate commercial returns in an activity that has a social purpose as well, and most of the profits are ploughed back in to the ‘business’.
If we think about how long it took the private investment market to develop, it’s clear that the social investment market will also take time to grow. We have no real track record yet to help us all understand the nature of these markets and products and the risks associated with them. So for some time, funders and investees will have to contend with a high level of uncertainty owing to the complexity of products, the untested legal and regulatory environment, and the significant risks it involves. In addition, for intermediaries, it’s expensive to become accredited by regulators in order to give advice on specific investments—NPC, for example, cannot afford to do this at present.
Social investment is supposed to be about a blended return: achieving a sub market financial return in ‘return’ for a social return. Our experience shows that many social investors so far are not particularly interested in the precise social return; they simply want to do ‘some good’. Sir Ronald is rightly very keen however, for measurement to take place, and we strongly agree and are involved in some of the work on this under the auspices of the G8 Taskforce that has been set up recently. However, it seems many social investors are currently willing to accept lower financial returns for only the promise of vague and loosely measured social returns. But perhaps there aren’t enough products to judge at the moment—we’ll have to see what happens.
Last year NPC produced Best to Invest?, a report looking at these issues from the funder perspective. The government is keen that charitable foundations put more money into social investment but they are in the main pretty reluctant to do a great deal more—after kicking off some of the early SIBs and social investments. Grant making trusts face a steep learning curve and a number of costs associated with social investment, for example around getting accredited advice.
My view is that social investment does make grant makers think a bit harder which is a good thing. Too often projects are grant supported and simply come to and end when the grant stops: social investment makes people think about whether their initiatives are sustainable. But we must ensure that social investment brings in new funds to the sector and doesn’t just shift existing money about, with grant money being replaced by social investment.
It’s early days for social investment and we still have a great deal to learn about what works and what doesn’t—and why. It might not be suitable for large parts of the charitable sector, but young people who might have set up new charities in the past are now thinking about setting up social enterprises and will need social investment.
The effort to get BSC and social investment up and running has been a valuable and at times heroic one. The task now is to tackle the problems and obstacles that surround it and to go ahead with optimism but also a sense of realism.
This article was originally written for Huffington Post here.
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